Financial Market Dislocations

54 Pages Posted: 26 Feb 2011 Last revised: 11 Jan 2013

See all articles by Paolo Pasquariello

Paolo Pasquariello

University of Michigan, Stephen M. Ross School of Business

Date Written: December 14, 2012

Abstract

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.

Keywords: Asset Pricing, Dislocations, Expected Returns, Financial Crisis, Arbitrage

JEL Classification: G01, G12

Suggested Citation

Pasquariello, Paolo, Financial Market Dislocations (December 14, 2012). AFA 2013 San Diego Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1769771 or http://dx.doi.org/10.2139/ssrn.1769771

Paolo Pasquariello (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

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Room R4434
Ann Arbor, MI 48109
United States
734-764-9286 (Phone)
240-526-7168 (Fax)

HOME PAGE: http://webuser.bus.umich.edu/ppasquar/

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