# George M. Constantinides's research while affiliated with University of Chicago and other places

## Publications (68)

Article
We contribute to identifying proxies for the information set of investors in financial markets. We show that the marketwide price-dividend ratio highly correlates with inflation and labor market variables that also forecast consumption, dividend, and GDP growth, but not with aggregate consumption or GDP growth. Our model with learning from inflatio...
Article
Full-text available
In model‐free out‐of‐sample tests, we find that the optimal portfolio of a utility maximizing investor trading in the S&P500 Index, cash, and index options bought at ask and written at bid prices stochastically dominates the optimal portfolio without options and yields returns with higher mean and lower volatility in most months from 1990 to 2013....
Article
We show that shocks to household consumption growth are negatively skewed, persistent, countercyclical, and drive asset prices. We construct a parsimonious model where heterogeneous households have recursive preferences. A single state variable drives the conditional cross-sectional moments of household consumption growth. The estimated model fits...
Article
Full-text available
Article
We present evidence that shocks to household consumption growth are negatively skewed, persistent, and countercyclical and play a major role in driving asset prices. We construct a parsimonious model with one state variable that drives the conditional cross-sectional moments of household consumption growth. The estimated model provides a good fit f...
Article
We construct a panel of S&P 500 Index call and put option portfolios, daily adjusted to maintain targeted maturity, moneyness, and unit market beta, and test multi-factor pricing models. The standard linear factor methodology is applicable because the monthly portfolio returns have low skewness and are close to normal. We hypothesize that any one o...
Article
Full-text available
Greece is at a decisive moment. It has to choose between defaulting and an economic program of structural reforms, privatization, efficient tax collection, and shrinking of the public sector. Unilateral suspension of debt payments would be an economic catastrophe for Greeks, resulting in deep cuts of civil servants' wages and pensions, bankruptcy f...
Article
The predictability of the market return and dividend growth is addressed in an equilibrium model with two regimes. A state variable that drives the conditional means of the aggregate consumption and dividend growth rates follows different time-series processes in the two regimes. In linear predictive regressions over 1930-2009, the market return is...
Article
American options on the S&P 500 index futures that violate the stochastic dominance bounds of Constantinides and Perrakis (2007) from 1983 to 2006 are identified as potentially profitable trades. Call bid prices more frequently violate their upper bound than put bid prices do, while violations of the lower bounds by ask prices are infrequent. In ou...
Article
Full-text available
Regulations allow market makers to short sell without borrowing stock, and the transactions of a major options market maker show that in most hard-to-borrow situations, it chooses not to borrow and instead fails to deliver stock to its buyers. A part of the value of failing passes through to options prices: when failing is cheaper than borrowing, t...
Article
Widespread violations of stochastic dominance by 1-month S&P 500 index call options over 1986--2006 imply that a trader can improve expected utility by engaging in a zero-net-cost trade net of transaction costs and bid-ask spread. Although precrash option prices conform to the Black-Scholes-Merton model reasonably well, they are incorrectly priced...
Article
The unconditional mean of the aggregate equity risk premium is almost six percent per year even after adjusting downwards the sample mean premium for unanticipated events in the latter part of the 20 th century. In this essay I present my theoretical and empirical research on three classes of generalizations of the standard neoclassical model and d...
Article
The Bansal and Yaron (2004) model of long run risks (LLR) in aggregate consumption and dividend growth and its extension that captures potential co-integration of the consumption and dividend levels, are tested on a cross-section of asset classes and rejected using annual data over the period 1930-2006 and using both annual and quarterly data over...
Article
Full-text available
We document widespread violations of stochastic dominance by one-month S&P 500 index call options market over 1986-2006. These violations imply that a trader can improve her expected utility by engaging in a zero-net-cost trade. We allow the market to be incomplete and also imperfect by introducing transaction costs and bid-ask spreads. Even though...
Article
Full-text available
We present a novel methodology for estimating/testing the Bansal and Yaron (2004) and related long-run risks (LRR) models based on the observation that the latent state variables are known functions of observables. The large standard error of the estimated elasticity of intertemporal substitution explains the controversy on its magnitude. The model...
Article
In this paper we incorporate a linear demand function to model the price-volume causal relationship into stochastic cost-volume-profit (CVP) analysis. We assume that the objective function is to maximize expected profit; other objective functions are also discussed and compared. A linear stochastic model follows from which probabilistic statements...
Article
We explore the consequences for asset pricing of admitting a bequest motive into an otherwise standard overlapping generations economy where agents trade equity, a risk free asset and consol bonds. With low risk aversion, the calibrated model produces realistic values for the mean equity premium and the risk free rate, the variance of the equity p...
Article
Full-text available
We derive equilibrium restrictions on the range of the transaction prices of American options on the stock market index and index futures. Trading over the lifetime of the options is accounted for, in contrast to earlier single-period results. The bounds on the reservation purchase price of American puts and the reservation write price of American...
Article
Several empirical regularities in the prices of financial assets are at odds with the predictions of standard economic theory. I address these regularities and explore the extent to which they are resolved in the context of two markets organized in very different ways. The first setting is a neoclassical economy with incomplete markets and heteroge...
Article
Proposals that a portion of the Social Security Trust Fund assets be invested in equities entail the possibility that a severe decline in equity prices will render the Fund’s assets insufficient to provide the currently mandated level of benefits. In this event, existing taxpayers may be compelled to act as insurers of last resort. The cost to taxp...
Article
By applying stochastic dominance arguments, upper bounds on the reservation write price of European calls and puts and lower bounds on the reservation purchase price of these derivatives are derived in the presence of proportional transaction costs incurred in trading the underlying security. The primary contribution is the derivation of bounds whe...
Article
Ongoing questions on the historical mean and standard deviation of the return on equities and bonds and on the equilibrium demand for these securities are addressed in the context of a stationary, overlapping-generations economy in which consumers are subject to a borrowing constraint. The key feature captured by the OLG economy is that the bulk of...
Article
The mean, covariability, and predictability of the return of different classes of financial assets challenge the rational economic model for an explanation. The unconditional mean aggregate equity premium is almost seven percent per year and remains high after adjusting downwards the sample mean premium by introducing prior beliefs about the statio...
Article
The observed discrepancies of derivative prices from their theoretical, arbitrage-free values are examined in the presence of proportional transaction costs. Analytic upper and lower bounds on the reservation write and purchase prices, respectively, are obtained when an investor's preferences exhibit constant relative risk aversion between zero and...
Article
The Euler equations of consumption are tested on the household consumption of nondurables and services, reconstructed from the CEX database. The estimated relative risk aversion coefficient of the representative household decreases, and the estimated unexplained mean equity premium decreases, as infra marginal asset holders are eliminated from the...
Article
Full-text available
Analytic bounds on the reservation write price of European-style contingent claims are derived in the presence of proportional transaction costs in a model which allows for intermediate trading. The option prices are obtained via a utility maximization approach by comparing the maximized utilities with and without the contingent claim. The mathemat...
Article
The theme of my address is transaction costs and their impact on the pricing of financial assets. In various forms, this has been a theme of my research over the course of the past several years. Oftentimes, in models of the financial markets we abstract from market imperfections in order to keep the model tractable and hope that this abstraction d...
Article
Proportional transaction costs are considered as a possible explanation of the volatility smile of index options. A tight upper bound on the call option price is derived in the presence of proportional transaction costs by extending stochastic dominance arguments. A tight and novel lower bound on the call option price is derived by imposing a plaus...
Article
Empirical difficulties encountered by representative-consumer models are resolved in an economy with heterogeneity in the form of uninsurable, persistent, and heteroscedastic labor income shocks. Given the joint process of arbitrage-free labor prices, dividends, and aggregate income satisfying a certain joint restriction, it is shown that this proc...
Article
We study consumption-based asset pricing models which allow for both habit persistence and durability of consumption goods. using quarterly consumption and asset return data for six countries. We estimate the parameters representing habit persistence or durability. risk version and time preference for each of the countries. We find that time-nonsep...
Article
A model of the nominal term structure of interest rates is developed that has a positive and stationary process for the interest rate and delivers closed-form expressions for the prices of discount bonds and European options on bonds. Unlike the one-state-variable version of the Cox, Ingersoll, and Ross (1985) model, this model--even in its one-sta...
Article
Habit persistence in preferences and durability of consumption goods both imply time-nonseparability in the derived utility for consumption expenditures. We study a simple model with both effects. Lagged consumption expenditures enter the Euler equation, where habit persistence implies that their coefficients are negative and durability implies pos...
Article
We introduce a new hybrid approach to joint estimation of Value at Risk (VaR) and Expected Shortfall (ES) for high quantiles of return distributions. We investigate the relative performance of VaR and ES models using daily returns for sixteen stock market indices (eight from developed and eight from emerging markets) prior to and during the 2008 fi...
Article
The equity premium puzzle, identified by Rajnish Mehra and Edward C. Prescott, states that, for plausible values of the risk aversion coefficient, the difference of the expected rate of return on the stock market and the riskless rate of interest is too large, given the observed small variance of the growth rate in per capita consumption. The puzzl...
Article
When management has private information it has an incentive to finance investment by issuing a security that is overpriced in the market. The market's valuation of the issued security may lead management either to forego profitable investments or to invest suboptimally. With investment fixed, there exist fully revealing signaling equilibria in whic...
Article
Changes in variance, or volatility, over time can be modeled using the approach based on autoregressive conditional heteroscedasticity. Another approach is to model variance as an unobserved stochastic process. Although it is not easy to obtain the exact likelihood function for such stochastic variance models, they tie in closely with developments...
Article
The tax law confers upon the investor a timing option - to realize capital losses and defer capital gains. With the tax rate on long term gains and losses being about half the short term rate, the law provides a second timing option - to realize losses short term and gains long term, if at all. Our theory and simulation over the 1962–1977 period es...
Article
Warrants and convertible bonds are claims on the firm which change the outstanding number of common stock shares when exercised or converted. Exercise of such claims in competitive circumstances is modeled here as a noncooperative game played by a continuum of players. First, equilibria of the game are shown to exist by applying results of Schmeidl...
Article
Tax considerations governing bondholders' optimal trading include: capital loss realization; capital gain deferment; change of the long-term holding period status to short-term by sale of the bond and repurchase, to realize future losses short-term; raising the basis above par by sale of the bond and repurchase, to deduct the amortized premium from...
Article
This paper examines the effect of the capital gains tax on investors' optimal consumption and investment behavior and on equilibrium asset prices in an intertemporal economy. It explictly considers the fact that capital gains and losses on stock are taxed only when the investor sells the stock. Ownership of stock then confers upon the investor a ti...
Article
This note deals with the conditional form of the law of large numbers (LLN). Let $T$ be a separable metric space, equipped with a non atomic probability $Q$, and $\mathcal{H}$ the class of Borel subsets $H\subset T$ satisfying $Q(H)>0$. Let $\mathcal{P}$ be any consistent set of finite dimensional distributions indexed by $T$. If \$\mathcal{H}_0\sub...
Article
We develop and implement a collocation method to solve for an equilibrium in the dynamic legislative bargaining game of Duggan and Kalandrakis (2008). We formulate the collocation equations in a quasi-discrete version of the model, and we show that the collocation equations are locally Lipchitz continuous and directionally differentiable. In numeri...
Article
We embed the Sharpe-Lintner, two-parameter asset pricing theory in an intertemporal general equilibrium model. The investment opportunity set changes stochastically over time; in general the short-term and long-term interest rates and the distribution of the rate of return of the market portfolio are non-stationary. This non-stationarity, which is...
Article
The effect of convex transactions costs on consumers' derived utility functions and on optimal consumption and investment decisions is examined in a general multiperiod framework. The extent to which multiperiod consumption-investment behavior and capital market equilibrium may be studied in a single period framework is discussed. Optimal investmen...
Article
We introduce a new hybrid approach to joint estimation of Value at Risk (VaR) and Expected Shortfall (ES) for high quantiles of return distributions. We investigate the relative performance of VaR and ES models using daily returns for sixteen stock market indices (eight from developed and eight from emerging markets) prior to and during the 2008 fi...
Article
A continuous time model of cash management is formulated with stochastic demand and allowing for positive and negative cash balances. The form of the optimal policy is assumed to be of a simple form (d, D, U, u). The parameters of the optimal policy are explicitly evaluated and the properties of the system are discussed.
Article
Kamin's theorem [Kamin, Jules H. 1975. Optimal portfolio revision with a proportional transaction cost. Management Sci. 21 (11, July).] on portfolio revision with proportional transaction costs is extended to allow for hyperbolic absolute risk averse investors and for the possibility of exogenous deterministic income, assuming that one of the two i...

## Citations

... In Constantinides et al. (2009) a system of linear equalities is constructed from all option bid and ask prices which admits a feasible solution if and only if there exists a monotone pricing kernel respecting bid-ask spreads. Frequent instances of infeasibility are documented with monthly SPX call options, motivating the pursuit of profitable option trading strategies in Constantinides et al. (2011Constantinides et al. ( , 2020. Infeasibility of the system of linear inequalities in Constantinides et al. (2009) is shown in Post and Longarela (2021) to be a necessary and sufficient condition for the existence of a second-order stochastic arbitrage opportunity. ...
... Efficient pricing of the options then implies that the OT portfolio should not dominate stochastically to the second order the IT, since otherwise all risk averse investors should add it to their holdings. This technique was applied for the first time theoretically by Constantinides and Perrakis (2002Perrakis ( , 2007, who used it to develop bounds under transaction costs for individual options, both European and American. These bounds were tested by Constantinides et al. (2009) for European S&P 500 index options, and Constantinides et al (2011), for S&P 500 American index futures options. ...
... Second, there are a few recent attempts to depart from consumption-only learning framework. Ghosh and Constantinides (2017) look for macroeconomic signals other than consumption that investors care about for asset pricing. Past consumption contains only a fraction of information that investors can utilize to form a belief for asset pricing. ...
... 10 The monotonicity of the pricing kernel also holds under frictions to a very close approximation for any type of asset dynamics, as analyzed in the following sections. It has been used in all empirical applications of SD such as Constantinides et al. (2009), Constantinides et al. (2011, 2020, which have recognized frictions and used the observed option bid and ask prices to derive their results. Nonetheless, the Dybvig-Beare results justify the SD approach also for the study of the frictionless market under a monotone decreasing pricing kernel, as already done in Oancea and Perrakis (2014), Perrakis (2019, Ch. 2) for diffusion and constant volatility jump diffusion. ...
... In order to achieve the purpose of the research, we aimed to perform a metanalysis based on qualitative and quantitative content analysis of representative scientific papers in this field. We consider metanalysis as being the most useful tool in summarizing the research results in the field and to provide ways in conducting further investigations (Auclert, 2019;Constantinides, 2017;Lusardi et al., 2017). Following a complex selection process on existing studies in the literature, a sample of 172 relevant studies from the Web of Science (WOS) database published between 1975-2018 was identified. ...
... This is done by the FED to avoid a further slowing down of the US economy and to boost the stock market. Note that, during this period, the US stock market was in the bear regime due to the terrorist attack of September 11, 2001 and the collapses of the Enron and WorldCom companies in year 2002 (see, e.g., Ghosh and Constantinides (2010), and Dendramis et al. (2014)). In year 2008, which is the second period of a bond market turmoil during our sample, the recent financial crisis associated with the collapse of Lehman Brothers in September 16, 2008 began. ...
... The main contribution of the proposed method, however, is the ability to deal with optimization with higher-degree SD constraints (4 ≤ N < ∞), especially N = 4. Using linear duality theory, an equivalent formulation for the sufficient condition (6)- (7) can be obtained in terms of portfolio optimality conditions for utility functions u ∈ U N . ...
... For example, leptokurtic idiosyncratic income risk has an important effect on the value of social insurance (Saez, 2001;Golosov, Troshkin, and Tsyvinski, 2016) and interacts with borrowing and saving decisions, with consequences for the distribution of wealth and marginal propensities to consume (Kaplan, Moll, and Violante, 2018). Another example is that the unequal incidence of business cycle fluctuations has important implications for the welfare cost of business cycles (e.g., Storesletten, Telmer, and Yaron, 2001;Krebs, 2003Krebs, , 2007, the conduct of stabilization policy (e.g., McKay and Reis, 2021;Bhandari, Evans, Golosov, and Sargent, 2021), and asset pricing (e.g., Mankiw, 1986;Constantinides and Duffie, 1996;Schmidt, 2014;Constantinides and Ghosh, 2016), among others. ...
... Krebs (2007) finds that the welfare costs of business cycles are much higher when considering that the idiosyncratic displacement risk is countercyclical. Recently Constantinides and Ghosh (2014) and Schmidt (2016) study the impact of idiosyncratic downside risk during recessions to explain asset prices. However, their key assumption that the shape of earnings shocks carries over to consumption is only valid if these shocks are persistent. ...
... The evident importance of the analysis of financial transactions, both in the field of financial mathematics and its application at the social level, reveal the need for research to provide analytical solutions. It is also relevant that the traditional methods applied in financial transactions lack flexibility and are not adapted to the needs of the client in an unequal and unstable society; for these reasons, the financial sector requires adaptation to the new situations that are generated in this new economic and social scenario [4]. ...