NBER Working Papers by Luca Benzoni

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Working Papers

March 2007Do Bonds Span Volatility Risk in the U.S. Treasury Market? A Specification test for Affine Term Structure Models
with Torben G. Andersen: w12962
We investigate whether bonds span the volatility risk in the U.S. Treasury market, as predicted by most 'affine' term structure models. To this end, we construct powerful and model-free empirical measures of the quadratic yield variation for a cross-section of fixed-maturity zero-coupon bonds ("realized yield volatility") through the use of high-frequency data. We find that the yield curve fails to span yield volatility, as the systematic volatility factors are largely unrelated to the cross-section of yields. We conclude that a broad class of affine diffusive, Gaussian-quadratic and affine jump-diffusive models is incapable of accommodating the observed yield volatility dynamics. An important implication is that the bond markets per se are incomplete and yield volatility risk cannot be he...

Published: Torben G. Andersen & Luca Benzoni, 2010. "Do Bonds Span Volatility Risk in the U.S. Treasury Market? A Specification Test for Affine Term Structure Models," Journal of Finance, American Finance Association, vol. 65(2), pages 603-653, 04. citation courtesy of

December 2005Can Standard Preferences Explain the Prices of out of the Money S&P 500 Put Options
with Pierre Collin-Dufresne, Robert S. Goldstein: w11861
Prior to the stock market crash of 1987, Black-Scholes implied volatilities of S&P 500 index options were relatively constant across moneyness. Since the crash, however, deep out-of-the-money S&P 500 put options have become %u2018expensive%u2019 relative to the Black-Scholes benchmark. Many researchers (e.g., Liu, Pan and Wang (2005)) have argued that such prices cannot be justified in a general equilibrium setting if the representative agent has %u2018standard preferences%u2019 and the endowment is an i.i.d. process. Below, however, we use the insight of Bansal and Yaron (2004) to demonstrate that the %u2018volatility smirk%u2019 can be rationalized if the agent is endowed with Epstein-Zin preferences and if the aggregate dividend and consumption processes are driven by a persistent stoch...
April 2005Portfolio Choice over the Life-Cycle in the Presence of 'Trickle Down' Labor Income
with Pierre Collin-Dufresne, Robert S. Goldstein: w11247
Empirical evidence shows that changes in aggregate labor income and stock market returns exhibit only weak correlation at short horizons. As we document below, however, this correlation increases substantially at longer horizons, which provides at least suggestive evidence that stock returns and labor income are cointegrated. In this paper, we investigate the implications of such a cointegrated relation for life-cycle optimal portfolio and consumption decisions of an agent whose non-tradable labor income faces permanent and temporary idiosyncratic shocks. We find that, under economically plausible calibrations, the optimal portfolio choice for the young investor is to take a substantial {\em short} position in the risky portfolio, in spite of the large risk premium associated with it. Intu...

Published: Benzoni, Luca, Pierre Collin-Dufresne and Robert S. Goldstein. "Portfolio Choice over the Life-Cycle when the Stock and Labor Markets Are Cointegrated." The Journal of Finance 62,5 (2007): 2123-2167.

October 2001An Empirical Investigation of Continuous-Time Equity Return Models
with Torben G. Andersen, Jesper Lund: w8510
This paper extends the class of stochastic volatility diffusions for asset returns to encompass Poisson jumps of time-varying intensity. We find that any reasonably descriptive continuous-time model for equity-index returns must allow for discrete jumps as well as stochastic volatility with a pronounced negative relationship between return and volatility innovations. We also find that the dominant empirical characteristics of the return process appear to be priced by the option market. Our analysis indicates a general correspondence between the evidence extracted from daily equity-index returns and the stylized features of the corresponding options market prices.

Published: Andersen, Torben G., Luca Benzoni and Jesper Lund. "An Empirical Investigation Of Continuous-Time Equity Return Models," Journal of Finance, 2002, v57(3,Jun), 1239-1284. citation courtesy of

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