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Jagannathan, Ravi

Works: 105 works in 410 publications in 1 language and 1,963 library holdings
Roles: Author, Editor, Honoree
Classifications: HB1, 330.072
Publication Timeline
Publications about Ravi Jagannathan
Publications by Ravi Jagannathan
Most widely held works by Ravi Jagannathan
Valuing the reload features of executive stock options by Steven Huddart( Book )
12 editions published in 1999 in English and held by 63 libraries worldwide
Under Statement of Financial Accounting Standards No. 123, the grant date value of executive stock options excludes the value of any reload feature because, at the time of writing the standard in 1995, the Financial Accounting Standards Board believed it was not feasible to value a reload feature at the grant date. We show how the Binomial Option Pricing Model can be used to determine the grant date value of such options. Ignoring the reload feature can substantially understate the value of the option: the reload feature increases the value of an otherwise similar option by 24 percent in the example we consider. In view of the potential significance of the reload feature and the versatility of the Binomial Option Pricing Model, the Financial Accounting Standards Board may wish to reconsider the accounting for options with a reload feature
Does product market competition reduce agency costs? by Ravi Jagannathan( Book )
13 editions published between 1999 and 2000 in English and held by 56 libraries worldwide
The folk wisdom is that competition reduces agency costs. We provide indirect empirical support for this view. We argue that the temptation to retain cash and engage in less productive activities is more severe for firms in less competitive industries. Hence an unanticipated increase in cash-flow due to higher past returns is more likely to lead to a reduction in leverage as well as a lowering of future returns for firms in less competitive environments. Current leverage will therefore be negatively related to past returns and positively related to future returns for such firms. In contrast, for firms in more competitive industries, the negative relation between past returns and current leverage will be attenuated. Theory suggests that the relation between current leverage and future returns for such firms will be zero or negative. Using a proxy to distinguish firms in less competitive industries and data for 165 single business firms in the U.S.A., we provide empirical supports for our arguments
Risk reduction in large portfolios : why imposing the wrong constraints helps by Ravi Jagannathan( Book )
12 editions published in 2002 in English and held by 53 libraries worldwide
Mean-variance efficient portfolios constructed using sample moments often involve taking extreme long and short positions. Hence practitioners often impose portfolio weight constraints when constructing efficient portfolios. Green and Hollifield (1992) argue that the presence of a single dominant factor in the covariance matrix of returns is why we observe extreme positive and negative weights. If this were the case then imposing the weight constraint should hurt whereas the empirical evidence is often to the contrary. We reconcile this apparent contradiction. We show that constraining portfolio weights to be nonnegative is equivalent to using the sample covariance matrix after reducing its large elements and then form the optimal portfolio without any restrictions on portfolio weights. This shrinkage helps reduce the risk in estimated optimal portfolios even when they have negative weights in the population. Surprisingly, we also find that once the nonnegativity constraint is imposed, minimum variance portfolios constructed using the monthly sample covariance matrix perform as well as those constructed using covariance matrices estimated using factor models, shrinkage estimators, and daily data. When minimizing tracking error is the criterion, using daily data instead of monthly data helps. However, the sample covariance matrix without any correction for microstructure effects performs the best
The declining U.S. equity premium by Ravi Jagannathan( Book )
14 editions published in 2001 in English and held by 52 libraries worldwide
Abstract: This study demonstrates that the U.S. equity premium has declined significantly during the last three decades. The study calculates the equity premium using a variation of a formula in the classic Gordon stock valuation model. The calculation includes the bond yield, the stock dividend yield, and the expected dividend growth rate, which in this formulation can change over time. The study calculates the premium for several measures of the aggregate U.S. stock portfolio and several assumptions about bond yields and stock dividends and gets basically the same result. The premium averaged about 7 percentage points during 1926 70 and only about 0.7 of a percentage point after that. This result is shown to be reasonable by demonstrating the roughly equal returns that investments in stocks and consol bonds of the same duration would have earned between 1982 and 1999, years when the equity premium is estimated to have been zero
Do we need CAPM for capital budgeting? by Ravi Jagannathan( Book )
13 editions published between 2001 and 2002 in English and held by 51 libraries worldwide
"A key input to the capital budgeting process is the cost of capital. Financial managers most often use the CAPM for estimating the cost of capital for which they need to know the market risk premium. Textbooks advocate using the historical value for the U.S. equity premium as the market risk premium. The CAPM as a model has been seriously challenged in the academic literature. In addition recent research indicates that the true market risk premium might have been as low as half the historical U.S. equity premium during the last two decades. If business finance courses have been teaching the use of the wrong model along with wrong inputs for twenty years, why has no one complained? We provide an answer to this puzzle"--National Bureau of Economic Research web site
Empirical evaluation of asset pricing models : a comparison of the SDF and beta methods by Ravi Jagannathan( Book )
12 editions published in 2001 in English and held by 51 libraries worldwide
The stochastic discount factor (SDF) method provides a unified general framework for econometric analysis of asset pricing models. It has recently been pointed out that the generality of the SDF method may come at the cost of estimation efficiency. We show that there is no need for this concern. The SDF method is as efficient as the classical beta method for estimating risk premia. In addition, the SDF method has an advantage -- the classical beta method, unlike the SDF method, substantially understates the effect of sampling errors when the estimated unanticipated changes in macroeconomic variables are used as pervasive factors
An evaluation of multi-factor CIR models using LIBOR, swap rates, and CAP and Swaption prices by Ravi Jagannathan( Book )
12 editions published in 2001 in English and held by 50 libraries worldwide
Abstract: We evaluate the classical Cox, Ingersoll and Ross (1985) (CIR) model using data on LIBOR, swap rates and caps and swaptions. With three factors the CIR model is able to fit the term structure of LIBOR and swap rates rather well. The model is able to match the hump shaped unconditional term structure of volatility in the LIBOR-swap market. However, statistical tests indicate that the model is misspecified. In particular the pricing errors are related to the slope of the swap yield curve. The economic importance of these shortcomings is highlighted when the model is confronted with data on cap and swaption prices. Pricing errors are large relative to the bid-ask spread in these markets. The model tends to overvalue shorter maturity caps and undervalue longer maturity caps. With only one or two factors, the model also tends to undervalue swaptions. Our findings point out the need for evaluating term structure models using data on derivative prices
Understanding mutual fund and hedge fund styles using return based style analysis by Arik Ben-Dor( Book )
11 editions published in 2002 in English and held by 49 libraries worldwide
We provide an introduction to the use of return based style analysis of Sharpe (1992) in practice. We demonstrate the importance of selecting the right style benchmarks and how the use of inappropriate style benchmarks may lead to wrong conclusions. When style analysis is applied to sector oriented funds such as healthcare, precious metals, energy, technology, etc., the set of benchmarks should include sector or industry indexes. Following Glosten and Jagannathan (1994), Fung and Hsieh (2001), and Agarwal and Naik (2001), we show how to analyze the investment style of hedge fund managers by including the returns on selected option based strategies as style benchmarks. In the examples we consider, return based style analysis provides insights not available through commonly used 'peer' evaluation alone
The stock market's reaction to unemployment news : why bad news is usually good for stocks by John Harvey Boyd( Book )
12 editions published in 2001 in English and held by 48 libraries worldwide
We find that on average an announcement of rising unemployment is 'good news' for stocks during economic expansions and 'bad news' during economic contractions. Thus stock prices usually increase on news of rising unemployment, since the economy is usually in an expansion phase. We provide an explanation for this phenomenon. Unemployment news bundles two primitive types of information relevant for valuing stocks: information about future interest rates and future corporate earnings and dividends. A rise in unemployment typically signals a decline in interest rates, which is good news for stocks, as well as a decline in future corporate earnings and dividends, which is bad news for stocks. The nature of the bundle -- and hence the relative importance of the two effects -- changes over time depending on the state of the economy. For stocks as a group, and in particular for cyclical stocks, information about interest rates dominates during expansions and information about future corporate earnings dominates during contractions
Ex-day behavior of Japanese stock prices : new insights from new methodology by Fumio Hayashi( Book )
11 editions published in 1990 in English and held by 42 libraries worldwide
Abstract: average higher than that for stocks without rights issues. We thus conclude
Consumption risk and the cost of equity capital by Ravi Jagannathan( Book )
10 editions published in 2005 in English and held by 38 libraries worldwide
"We demonstrate, using data for the period 1954-2003, that differences in exposure to consumption risk explains cross sectional differences in average excess returns (cost of equity capital) across the 25 benchmark equity portfolios constructed by Fama and French (1993). We use yearly returns on stocks to take into account well documented within year deterministic seasonal patterns in returns, measurement errors in the consumption data, and possible slow adjustment of consumption to changes in wealth due to habit and prior commitments. Consumption during the fourth quarter is likely to have a larger discretionary component. Further, given the availability of more leisure time during the holiday season and the ending of the tax year in December, investors are more likely to review their asset holdings and make trading decisions during the fourth quarter. We therefore match the growth rate in the fourth quarter consumption from one year to the next with the corresponding calendar year return when computing the latter's exposure to consumption risk. We find strong support for our consumption risk model specification in the data"--National Bureau of Economic Research web site
Assessing the risk in sample minimum risk portfolios by Gopal Krishna Basak( Book )
8 editions published in 2004 in English and held by 38 libraries worldwide
We show that the in-sample estimate of the variance of a global minimum risk portfolio constructed using an estimated covariance matrix of returns will on average be strictly smaller than its true variance. Scaling the in-sample estimate upward by a standard degrees-of-freedom related factor or using the Bayes covariance matrix estimator can be inadequate; the correction is likely to be twice as large as the standard correction when returns are i.i.d. multivariate Normal. We develop a Jackknife-type estimator of the optimal portfolio's variance that is valid when returns are i.i.d.; and a variation that may be better when returns exhibit volatility persistence. We empirically demonstrate the need to correct for in-sample optimism by considering an optimal portfolio of 200 stocks that has the lowest tracking error when the S & P500 is the benchmark and three years of daily return data are used for estimating covariances. When the optimal portfolio is constructed using the sample covariance matrix, the standard deviation of the tracking error is 1.46 percent whereas its in-sample estimate is 0.94 percent. Standard degrees of freedom correction gives an estimate of 1.10 percent; our correction, 1.24 percent; and the weighted Jackknife, 1.36 percent
Informed trading, liquidity provision and stock selection by mutual funds by Zhi Da( Book )
15 editions published between 2007 and 2009 in English and held by 31 libraries worldwide
We show that the stock selection ability of a fund manager can be decomposed into two components: "informed trading" and "liquidity provision." As information loses value over time, informed trading tends to be liquidity-absorbing. We conjecture that value enhancing informed trading is more likely in stocks during times when they are associated with more information events. In contrast, liquidity provision is more likely to add value for stocks associated with few information events and little adverse selection risk. We identify times when there are more information events associated with a stock by its Probability of Informed Trading (PIN, Easley et. al., 1996) measure and information asymmetry component of the spread (Madhavan et. al., 1997). We provide empirical support for our conjecture using quarterly mutual fund holdings data for the period from 1983 to 2004. We find that the informed trading component is relatively more important for mutual funds with a growth oriented investment style whereas liquidity provision is more important for funds with more of an income orientation. Further, the informed trading component of the selection ability of a mutual fund exhibits greater persistence over time
Assessing specification errors in stochastic discount factor models by Lars Peter Hansen( Book )
8 editions published in 1994 in English and held by 30 libraries worldwide
In this paper we develop alternative ways to compare asset pricing models when it is understood that their implied stochastic discount factors do not price all portfolios correctly. Unlike comparisons based on x2 statistics associated with null hypothesis that models are correct, our measures of model performance do not reward variability of discount factor proxies. One of our measures is designed to exploit fully the implications of arbitrage-free pricing of derivative claims. We demonstrate empirically the usefulness of methods in assessing some alternative stochastic factor models that have been proposed in asset pricing literature
Why do IPO auctions fail? by Ravi Jagannathan( Book )
10 editions published in 2006 in English and held by 26 libraries worldwide
We document a somewhat surprising regularity: of the many countries that have used IPO auctions, virtually all have abandoned them. The common explanations given for the lack of popularity of the auction method in the U.S., viz., issuer reluctance to try a new experimental method, and underwriter pressure towards methods that lead to higher fees, do not fit the evidence. We examine why auctions have failed and verify, to the extent possible, that they are consistent with what academic theory predicts. Both uniform price and discriminatory auctions are plagued by unexpectedly large fluctuations in the number of participants. The free rider problem and the winner's curse hamper price discovery and discourage investors from participating in auctions. That may explain the inaccurate pricing and poor aftermarket performance of IPOs using auctions
Implications of security market data for models of dynamic economies by Lars Peter Hansen( Book )
9 editions published in 1990 in English and held by 25 libraries worldwide
We show how to use security market data to restrict the admissible region for means and standard deviations of intertemporal marginal rates of substitution (IMRS's) of consumers. Our approach is (i) nonparametric and applies to a rich class of models of dynamic economies; (ii) characterizes the duality between the mean-standard deviation frontier for IMRS's and the familiar mean-standard deviation frontier for asset returns; and (iii) exploits the restriction that IMRS's are positive random variables. The region provides a convenient summary of the sense in which asset market data are anomalous from the vantage point of intertemporal asset pricing theory
Do hot hands persist among hedge fund managers? : an empirical evaluation by Ravi Jagannathan( Book )
8 editions published in 2006 in English and held by 24 libraries worldwide
In this paper we empirically demonstrate that both hot and cold hands among hedge fund managers tend to persist. While measuring performance, we use statistical model selection methods for identifying style benchmarks for a given hedge fund and allow for the possibility that hedge fund net asset values may be based on stale prices for illiquid assets. We are able to eliminate the backfill bias by deleting all the backfill observations in our dataset. We also take into account the self-selection bias introduced by the fact that both successful and unsuccessful hedge funds stop reporting information to the database provider. The former stop accepting new money and the latter get liquidated. We find statistically as well as economically significant persistence in the performance of funds relative to their style benchmarks. It appears that half of the superior or inferior performance during a three year interval will spill over into the following three year interval
CAPM for estimating the cost of equity capital : interpreting the empirical evidence by Zhi Da( Book )
7 editions published in 2009 in English and held by 12 libraries worldwide
We argue that the CAPM may be a reasonable model for estimating the cost of capital for projects in spite of increasing criticisms in the empirical asset pricing literature. Following Hoberg and Welch (2007), we first show that there is more support for the CAPM than has been previously thought. We then present evidence that is consistent with the view that the option to modify existing projects and undertake new projects available to firms may be an important reason for the poor performance of the CAPM in explaining the cross section of returns on size and book-to-market sorted stock portfolios. That lends support to the McDonald and Siegel (1985) and Berk, Green and Naik (1999) observation that stock returns need not satisfy the CAPM even when the expected returns on all individual projects do. From the perspective of a person who believes that the CAPM provides a reasonable estimate of the required return on elementary individual projects, the empirical evidence in the literature is not sufficient to abandon the use of the CAPM in favor of other models
Why don't issuers choose IPO auctions? : the complexity of indirect mechanisms by Ravi Jagannathan( Book )
7 editions published in 2010 in English and held by 7 libraries worldwide
At least 25 countries have used IPO auctions, but most have since abandoned them. We argue that this is because auctions, being indirect mechanisms, require a level of sophistication above that of many investors. Through suitably calibrated examples, we show that even sophisticated investors can make mistakes while bidding in auctions, especially when facing uncertainty about the number and type of bidders, and such mistakes impose costs on other participants. We provide empirical support for our arguments. IPO auctions have been plagued by unexpectedly large fluctuations in the number of participants, return chasing investors, and high-bidding free riders. Our analysis suggests that a direct mechanism that resembles a transparent version of book building would be preferable to auctions -- National Bureau of Economic Research web site
The cross-section of hurdle rates for capital budgeting : an empirical analysis of survey data by Ravi Jagannathan( Book )
7 editions published in 2011 in English and held by 6 libraries worldwide
Whereas Poterba and Summers (1995) find that firms use hurdle rates that are unrelated to their CAPM betas, Graham and Harvey (2001) find that 74% of their survey firms use the CAPM for capital budgeting. We provide an explanation for these two apparently contradictory conclusions. We find that firms behave as though they add a hurdle premium to their CAPM based cost of capital. Following McDonald and Siegel (1986), we argue that the hurdle premium depends on the value of the option to defer investments. While CAPM explains only 10% of the cross-sectional variation in hurdle rates across firms, variables that proxy for the benefits from the option to wait for potentially better investment opportunities explain 35%. Estimates of our hurdle premium model parameters imply an equity premium of 3.8% per year, a figure that is essentially the same as that reported in the survey by Graham and Harvey (2005). Consistent with our model, growth firms use a higher hurdle rate when compared to value firms, even though they have a lower cost of capital
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Alternative Names
Jagannathan, R. 1949-
Ravi Jagannathan American economist
Ravi Jagannathan economista estadounidense
Ravi Jagannathan économiste américain
English (211)
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