Financial Market Dislocations
University of Michigan - Stephen M. Ross School of Business
December 14, 2012
AFA 2013 San Diego Meetings Paper
Dislocations occur when financial markets, operating under stressful conditions, experience large, widespread asset mispricings. This study documents systematic dislocations in world capital markets and the importance of their fluctuations for expected asset returns. Our novel, model-free measure of these dislocations is a monthly average of six hundred abnormal absolute violations of three textbook arbitrage parities in stock, foreign exchange, and money markets. We find that investors demand economically and statistically significant risk premiums to hold financial assets performing poorly during market dislocations.
Number of Pages in PDF File: 54
Keywords: Asset Pricing, Dislocations, Expected Returns, Financial Crisis, Arbitrage
JEL Classification: G01, G12working papers series
Date posted: February 26, 2011 ; Last revised: January 11, 2013
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