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Author: Edward R. Lawrence
Publisher:
ISBN:
Category :
Languages : en
Pages : 280
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Author: Edward R. Lawrence
Publisher:
ISBN:
Category :
Languages : en
Pages : 280
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Author: Irina Pimenova
Publisher:
ISBN:
Category :
Languages : en
Pages : 206
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In this dissertation, I revisit two problems in empirical asset pricing. In Chapter 1, I propose a methodology to evaluate the validity of linear asset pricing factor models under short sale restrictions using a regression-based test. The test is based on the revised null hypothesis that intercepts obtained from regressing excess returns of test assets on factor returns, usually referred to as alphas, are non-positive. I show that under short sale restrictions a much larger set of models is supported by the data than without restrictions. In particular, the Fama-French five-factor model augmented with the momentum factor is rejected less often than other models. In Chapter 2, I investigate patterns of equity premium predictability in international capital markets and explore the robustness of common predictive variables. In particular, I focus on predictive regressions with multiple predictors: dividend-price ratio, four interest rate variables, and inflation. To obtain precise estimates, two estimation methods are employed. First, I consider all capital markets jointly as a system of regressions. Second, I take into account uncertainty about which potential predictors forecast excess returns by employing spike-and-slab prior. My results suggest evidence in favor of predictability is weak both in- and out-of-sample and limited to a few countries. The strong predictability observed on the U.S. market is rather exceptional. In addition, my analysis shows that considering model uncertainty is essential as it leads to a statistically significant increase of investors' welfare both in- and out-of-sample. On the other hand, the welfare increase associated with considering capital markets jointly is relatively modest. However, it leads to reconsider the relative importance of predictive variables because the variables that are statistically significant predictors in the country-specific regressions are insignificant when the capital markets are studied jointly. In particular, my results suggest that the in-sample evidence in favor of the interest rate variables, that are believed to be among the most robust predictors by the literature, is spurious and is mostly driven by ignoring the cross-country information. Conversely, the dividend-price ratio emerges as the only robust predictor of future stock returns.
Author: Lingxiao Zhao
Publisher:
ISBN:
Category : Electronic dissertations
Languages : en
Pages : 80
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In my dissertation, I focus on theoretical and empirical asset pricing from a Bayesian model comparison perspective. In the first Chapter, revisiting the framework of Barillas and Shanken (2018), BS henceforth, we show that the Bayesian marginal likelihood-based model comparison method in that paper is unsound: the priors on the nuisance parameters across models must satisfy a change of variable property for densities that is violated by the Jeffreys priors used in the BS method. Extensive simulation exercises confirm that the BS method performs unsatisfactorily. We derive a new class of improper priors on the nuisance parameters, starting from a single improper prior, which leads to valid marginal likelihoods and model comparisons. The performance of our marginal likelihoods is significantly better, allowing for reliable Bayesian work on which factors are risk factors in asset pricing models. In the second Chapter, starting from the twelve distinct risk factors in four well-established asset pricing models, a pool we refer to as the winners, we construct and compare 4,095 asset pricing models and find that the model with the risk factors, Mkt, SMB, MOM, ROE, MGMT, and PEAD, performs the best in terms of Bayesian posterior probability, out-of-sample predictability, and Sharpe ratio. A more extensive model comparison of 8,388,607 models, constructed from the twelve winners plus eleven principal components of anomalies unexplained by the winners, shows the benefit of incorporating information in genuine anomalies in explaining the cross-section of expected equity returns.
Author: Qianqiu Liu
Publisher:
ISBN:
Category :
Languages : en
Pages : 121
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This dissertation explores using high-frequency data in empirical asset pricing models. Since 1990s, the progress of information technology has made tick-by-tick data available in some financial markets and also allows for empirical investigations of a wide range of issues.
Author: Xiang Zhang
Publisher:
ISBN: 9788449039119
Category :
Languages : en
Pages : 121
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This thesis consists of three essays on empirical asset pricing around three themes: evaluating linear factor asset pricing models by comparing their misspecified measures, understanding the long-run risk on consumption-leisure to investigate their pricing performances on cross-sectional returns, and evaluating conditional asset pricing models by using the methodology of dynamic cross-sectional regressions. The first chapter is ̀̀Comparing Asset Pricing Models: What does the Hansen-Jagannathan Distance Tell Us?''. It compares the relative performance of some important linear asset pricing models based on the Hansen-Jagannathan (HJ) distance using data over a long sample period from 1952-2011 based on U.S. market. The main results are as follows: first, among return-based linear models, the Fama-French (1993) five-factor model performs best in terms of the normalized pricing errors, compared with the other candidates. On the other hand, the macro-factor model of Chen, Roll, and Ross (1986) five-factor is not able to explain industry portfolios: its performance is even worse than that of the classical CAPM. Second, the Yogo (2006) non-durable and durable consumption model is the least misspecified, among consumption-based asset pricing models, in capturing the spread in industry and size portfolios. Third, the Lettau and Ludvigson (2002) scaled consumption-based CAPM (C-CAPM) model obtains the smallest normalized pricing errors pricing gross and excess returns on size portfolios, respectively, while Santos and Veronesi (2006) scaled C-CAPM model does better in explain the return spread on portfolios of U.S. government bonds. The second chapter (̀̀Leisure, Consumption and Long Run Risk: An Empirical Evaluation'') uses a long-run risk model with non-separable leisure and consumption, and studies its ability to price equity returns on a variety of portfolios of U.S. stocks using data from 1948-2011. It builds on early work by Eichenbaum et al. (1988) that explores the empirical properties of intertemporal asset pricing models where the representative agent has utility over consumption and leisure. Here we use the framework in Uhlig (2007) that allows for a stochastic discount factor with news about long-run growth in consumption and leisure. To evaluate our long-run model, we assess its performance relative to standard asset pricing models in explaining the cross-section of returns across size, industry and value-growth portfolios. We find that the long-run consumption-leisure model cannot be rejected by the J-statistic and it does better than the standard C-CAPM, the Yogo durable consumption and Fama-French three-factor models. We also rank the normalized pricing errors using the HJ distance: our model has a smaller HJ distance than other candidate models. Our paper is the first, as far as we are aware, to use leisure data with adjusted working hours as a measure of leisure i.e., defined as the difference between a fixed time endowment and the observable hours spent on working, home production, schooling, communication, and personal care (Yang (2010)). The third essay: ̀̀Empirical Evaluation of Conditional Asset Pricing Models: An Economic Perspective'' uses dynamic Fama-MacBeth cross-sectional regressions and tests the performance of several important conditional asset pricing models when allowing for time-varying price of risk. It compares the performance of conditional asset pricing models, in terms of their ability to explain the cross-section of returns across momentum, industry, value-growth and government bond portfolios. We use the new methodology introduced by Adrian et al. (2012). Our main results are as follows: first we find that the Lettau and Ludvigson (2001) conditional model does better than other models in explaining the cross-section of momentum and value-growth portfolios. Second we find that the Piazessi et al. (2007) consumption model does better than others in pricing the cross-section of industry portfolios. Finally, we find that in the case of the cross-section of risk premia on U.S. government bond portfolios the conditional model in Santos and Veronesi (2006) outperforms other candidate models. Overall, however, the Lettau and Ludvigson (2001) model does better than other candidate models. Our main contributions here is using a recently developed method of dynamic Fama-MacBeth regressions to evaluate the performance of leading conditional CAPM (C-CAPM) models in a common set of test assets over the time period from 1951-2012.
Author: Wayne Ferson
Publisher: MIT Press
ISBN: 0262039370
Category : Business & Economics
Languages : en
Pages : 497
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An introduction to the theory and methods of empirical asset pricing, integrating classical foundations with recent developments. This book offers a comprehensive advanced introduction to asset pricing, the study of models for the prices and returns of various securities. The focus is empirical, emphasizing how the models relate to the data. The book offers a uniquely integrated treatment, combining classical foundations with more recent developments in the literature and relating some of the material to applications in investment management. It covers the theory of empirical asset pricing, the main empirical methods, and a range of applied topics. The book introduces the theory of empirical asset pricing through three main paradigms: mean variance analysis, stochastic discount factors, and beta pricing models. It describes empirical methods, beginning with the generalized method of moments (GMM) and viewing other methods as special cases of GMM; offers a comprehensive review of fund performance evaluation; and presents selected applied topics, including a substantial chapter on predictability in asset markets that covers predicting the level of returns, volatility and higher moments, and predicting cross-sectional differences in returns. Other chapters cover production-based asset pricing, long-run risk models, the Campbell-Shiller approximation, the debate on covariance versus characteristics, and the relation of volatility to the cross-section of stock returns. An extensive reference section captures the current state of the field. The book is intended for use by graduate students in finance and economics; it can also serve as a reference for professionals.
Author: Yan Li
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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My dissertation contains three chapters. Chapter one proposes a nonparametric method to evaluate the performance of a conditional factor model in explaining the cross section of stock returns. There are two tests: one is based on the individual pricing error of a conditional model and the other is based on the average pricing error. Empirical results show that for valueweighted portfolios, the conditional CAPM explains none of the asset-pricing anomalies, while the conditional Fama-French three-factor model is able to account for the size effect, and it also helps to explain the value effect and the momentum effect. From a statistical point of view, a conditional model always beats a conditional one because it is closer to the true data-generating process. Chapter two proposes a general equilibrium model to study the implications of prospect theory for individual trading, security prices and trading volume. Its main finding is that different components of prospect theory make different predictions. The concavity/convexity of the value function drives a disposition effect, which in turn leads to momentum in the cross-section of stock returns and a positive correlation between returns and volumes. On the other hand, loss aversion predicts exactly the opposite, namely a reversed disposition effect and reversal in the cross-section of stock returns, as well as a negative correlation between returns and volumes. In a calibrated economy, when prospect theory preference parameters are set at the values estimated by the previous studies, our model can generate price momentum of up to 7% on an annual basis. Chapter three studies the role of aggregate dividend volatility in asset prices. In the model, narrow-framing investors are loss averse over fluctuations in the value of their financial wealth. Persistent dividend volatility indicates persistent fluctuation in their financial wealth and makes stocks undesirable. It helps to explain the salient feature of the stock market including the high mean, excess volatility, and predictability of stock returns while maintaining a low and stable risk-free rate. Consistent with the data, stock returns have a low correlation with consumption growth, and Sharpe ratios are time-varying.
Author: Fatima Khushnud
Publisher:
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Category :
Languages : en
Pages :
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This dissertation follows on an asset pricing theme. Overall, it explores asset pricing tests in the equity and the bond markets and attempts to identify the common risk factors that best explain cross sectional variation in stock and bond returns. The first three studies use US data, while the last study explores European bonds data. The sample period is from January 2002 to December 2012 and the Fama and French (1993) time series framework is used in each of the studies. The first two studies in this dissertation focus on equity markets, while the third and fourth study encompasses the US and European corporate bond markets respectively. There has been extensive research on asset pricing models. However, despite being a well-researched area, there is little consensus as to which model is most appropriate. Motivated by this gap in literature, this thesis builds on the work of Fama and French (1993) and applies their time series framework to both equity and bonds. Chapter 2 draws on the link between firm leverage and stock returns as supported by capital structure theory. It examines whether a leverage (LEV) factor exhibits explanatory power over the US stock return variations. The analysis indicates that the LEV factor significantly contributes towards the explanatory power of the fitted models and thus appears to have some explanatory power over U.S. stock returns. Chapter 3 addresses the question of whether ex-post returns should be used in testing ex-ante asset pricing models. This chapter explores the impact of using IBES mean target price as a proxy for expected price in tests of the CAPM, Fama and French (1993) three factor and the Cahart (1997) four factor models. The analysis suggests that the expectation based proxy of returns performs in a similar manner to realized returns in asset pricing tests and thus the use of realized returns should not adversely bias asset pricing tests. Chapter 4 and 5 add to the bond pricing literature by applying time-series studies to US and European bonds. Chapter 4 investigates common risk factors within the US corporate bond returns. The analysis shows that stock market factors do not add explanatory power to the bond return models used in this study. The bond market factor, DEF, dominates all other explanatory variables in regression analysis. Chapter 5 of this dissertation examines the common risk factors explaining variation within the European corporate bond returns. The results are consistent with Chapter 4 indicating that the European DEF factor also captures much of the variation in European bond returns. This dissertation enhances our understanding of the asset pricing models within a Fama and French (1993) time series framework for both equity and bond markets. Support is provided for the importance of leverage in asset pricing. The choice between realised returns and expected returns is also explored in this thesis, with the results suggesting that this choice has little impact on the results from time series asset pricing tests. The pricing of corporate bonds is also explored with evidence to confirm the Fama and French (193) result that equity and bond pricing models differ considerably in US market. Finally, it is found that the key pricing factors are common to both US and European corporate bonds.
Author: Ulrich Johannes Hammerich
Publisher:
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Category :
Languages : en
Pages :
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This dissertation is not only a pioneer work in the new finance sphere cultural finance, but also a feat of fundamental research in international empirical asset pricing. I present significant evidence that the most basic stock characteristic, the nominal price, is consequential for stock returns (and associated with higher statistical moments) in a comprehensive cross-country dataset comprising 41 countries and a culture-dependent capital market anomaly (as it was already shown e.g. for the momentum effect). For the case of Germany, I additionally provide an in-depth analysis of the price effect (i.e. a high/low price of an asset goes hand in hand with high/low subsequent returns) as this country offers a unique possibility to investigate the evolution and trigger of this genuinely price-based capital market anomaly due to a rapid and dramatic countrywide dispersion of stock prices in the aftermath of law amendments. Furthermore, I find the explanatory power of risk factor mimicking hedge portfolios (especially RMRF, HML, and WML, i.e. the beta, value, and momentum factors), which are consistently implemented in empirical asset pricing models (like the FF 3-, 5-, and 6-factor models and the Carhart 4-factor model), as well as their effectiveness as investment styles to vary across cultures. That is, the spectrum of this dissertation strikes both implications of the weak EMH that time series data (like the price) should have no informational value for future returns and assumptions of theoretical asset pricing models that (only) systematic risk (CAPM), future investment opportunities (ICAPM) or consumption risk (CCAPM) drives asset returns (universally). Finally, yet importantly, I find evidence that even cultural characteristics in itself (measured via the cultural dimensions of Hofstede and others) have explanatory and predictive power for global, cross-sectional stock returns as well as characteristics-based (hedge) portfolio returns. By virtue of these contributions to pertinent financial research, this dissertation is an empirical primer for possible future fields of research culture-based/culture-neutral asset pricing, asset management, and asset allocation.
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Languages : en
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