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Author: Hitesh Doshi
Publisher:
ISBN:
Category :
Languages : en
Pages : 61
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Book Description
Building on the theoretical asset pricing literature, we examine the role of market risk and the size, book-to-market (BTM), and volatility anomalies in the cross-section of unlevered equity returns. Compared with levered (stock) returns, the unlevered market beta plays a more important role in explaining the cross-section of unlevered equity returns, even when we control for size and BTM. The size effect is weakened, while the value premium and the volatility puzzle virtually disappear for unlevered returns. We show that leverage induces heteroskedasticity in returns. Unlevering returns removes this pattern, which is otherwise difficult to address by controlling for leverage in regressions.
Author: Hitesh Doshi
Publisher:
ISBN:
Category :
Languages : en
Pages : 61
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Book Description
Building on the theoretical asset pricing literature, we examine the role of market risk and the size, book-to-market (BTM), and volatility anomalies in the cross-section of unlevered equity returns. Compared with levered (stock) returns, the unlevered market beta plays a more important role in explaining the cross-section of unlevered equity returns, even when we control for size and BTM. The size effect is weakened, while the value premium and the volatility puzzle virtually disappear for unlevered returns. We show that leverage induces heteroskedasticity in returns. Unlevering returns removes this pattern, which is otherwise difficult to address by controlling for leverage in regressions.
Author: Gian Luca Clementi
Publisher:
ISBN:
Category : Investment analysis
Languages : en
Pages : 44
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Book Description
When the neoclassical model of investment is serious about investment, it fails to replicate elementary cross-sectional features of equity returns. Without leverage, the model produces a value discount -- i.e. value firms earn lower returns than growth firms. With large enough operating leverage, a value premium emerges, but its magnitude is always smaller than the size premium's. Furthermore, when parameters are set to match key moments of the cross-sectional distribution of investment and the average book-to-market ratio, the value premium is minuscule -- about one order of magnitude smaller than found in the data. This result holds true for different specifications of the stochastic discount factor and does not depend upon the magnitude of capital adjustment costs.
Author: Andres Donangelo
Publisher:
ISBN:
Category :
Languages : en
Pages : 60
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Book Description
Using a standard production model, we demonstrate theoretically that, even if labor is fully flexible, it generates a form of operating leverage if (a) wages are smoother than productivity and (b) the capital-labor elasticity of substitution is strictly less than one. Our model supports using labor share-the ratio of labor expenses to value added-as a proxy for labor leverage. We show evidence for conditions (a) and (b), and we demonstrate the economic significance of labor leverage: High labor-share firms have operating profits that are more sensitive to shocks, and they have higher expected asset returns.
Author: Ravi Bansal
Publisher:
ISBN:
Category :
Languages : en
Pages : 46
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Book Description
A central economic idea is that an asset's risk premium is determined by its ability to insure against fluctuations in consumption (i.e., by the consumption beta). Cross-sectional differences in consumption betas mirror differences in the exposure of the asset's dividends to aggregate consumption, an implication of many general equilibrium models. Hence, cross-sectional differences in the exposure of dividends to consumption may provide valuable information regarding the cross-sectional dispersion in risk premia. We measure the exposure of dividends to consumption (labeled as consumption leverage) by the covariance of ex-post dividend growth rates with the expected consumption growth rate, and alternatively by relying on stochastic cointegration between dividends and consumption. Cross-sectional differences in this consumption leverage parameter can explain about 50% of the variation in risk premia across 30 portfolios - which include 10 momentum, 10 size, and 10 book-to-market sorted portfolios. The consumption leverage model can justify much of the observed value, momentum, and size risk premium spreads. For this asset menu, alternative models proposed in the literature (including time varying beta models) have considerable difficulty in justifying the cross-sectional dispersion in the risk premia. Our measures of consumption leverage are driven by the exposure of dividend growth rates to low frequency movements in consumption growth. We document that it is this exposure that contains valuable information regarding the cross-sectional differences in risk premia across assets.
Author: Paul Gomme
Publisher: London : Department of Economics, University of Western Ontario
ISBN:
Category : Business cycles
Languages : en
Pages : 52
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Book Description
Author: Lorenzo Garlappi
Publisher:
ISBN:
Category :
Languages : en
Pages : 74
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Book Description
We explicitly consider financial leverage in a simple equity valuation model and study the cross-sectional implications of potential shareholder recovery upon resolution of financial distress. We show that our model is capable of simultaneously explaining lower returns for financially distressed stocks, stronger book-to-market effects for firms with high default likelihood, and the concentration of momentum profits among low credit quality firms. The model further predicts (i) a hump-shaped relationship between value premium and default probability, and (ii) stronger momentum profits for nearly distressed firms with significant prospects for shareholder recovery. Our empirical analysis strongly confirms these novel predictions.
Author: Turan G. Bali
Publisher: John Wiley & Sons
ISBN: 1118589475
Category : Business & Economics
Languages : en
Pages : 512
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Book Description
“Bali, Engle, and Murray have produced a highly accessible introduction to the techniques and evidence of modern empirical asset pricing. This book should be read and absorbed by every serious student of the field, academic and professional.” Eugene Fama, Robert R. McCormick Distinguished Service Professor of Finance, University of Chicago and 2013 Nobel Laureate in Economic Sciences “The empirical analysis of the cross-section of stock returns is a monumental achievement of half a century of finance research. Both the established facts and the methods used to discover them have subtle complexities that can mislead casual observers and novice researchers. Bali, Engle, and Murray’s clear and careful guide to these issues provides a firm foundation for future discoveries.” John Campbell, Morton L. and Carole S. Olshan Professor of Economics, Harvard University “Bali, Engle, and Murray provide clear and accessible descriptions of many of the most important empirical techniques and results in asset pricing.” Kenneth R. French, Roth Family Distinguished Professor of Finance, Tuck School of Business, Dartmouth College “This exciting new book presents a thorough review of what we know about the cross-section of stock returns. Given its comprehensive nature, systematic approach, and easy-to-understand language, the book is a valuable resource for any introductory PhD class in empirical asset pricing.” Lubos Pastor, Charles P. McQuaid Professor of Finance, University of Chicago Empirical Asset Pricing: The Cross Section of Stock Returns is a comprehensive overview of the most important findings of empirical asset pricing research. The book begins with thorough expositions of the most prevalent econometric techniques with in-depth discussions of the implementation and interpretation of results illustrated through detailed examples. The second half of the book applies these techniques to demonstrate the most salient patterns observed in stock returns. The phenomena documented form the basis for a range of investment strategies as well as the foundations of contemporary empirical asset pricing research. Empirical Asset Pricing: The Cross Section of Stock Returns also includes: Discussions on the driving forces behind the patterns observed in the stock market An extensive set of results that serve as a reference for practitioners and academics alike Numerous references to both contemporary and foundational research articles Empirical Asset Pricing: The Cross Section of Stock Returns is an ideal textbook for graduate-level courses in asset pricing and portfolio management. The book is also an indispensable reference for researchers and practitioners in finance and economics. Turan G. Bali, PhD, is the Robert Parker Chair Professor of Finance in the McDonough School of Business at Georgetown University. The recipient of the 2014 Jack Treynor prize, he is the coauthor of Mathematical Methods for Finance: Tools for Asset and Risk Management, also published by Wiley. Robert F. Engle, PhD, is the Michael Armellino Professor of Finance in the Stern School of Business at New York University. He is the 2003 Nobel Laureate in Economic Sciences, Director of the New York University Stern Volatility Institute, and co-founding President of the Society for Financial Econometrics. Scott Murray, PhD, is an Assistant Professor in the Department of Finance in the J. Mack Robinson College of Business at Georgia State University. He is the recipient of the 2014 Jack Treynor prize.
Author: Peter Carman
Publisher: Routledge
ISBN: 9781884964718
Category : Business & Economics
Languages : en
Pages : 386
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Book Description
First Published in 1997. Routledge is an imprint of Taylor & Francis, an informa company.
Author: Peter Hecht
Publisher:
ISBN:
Category :
Languages : en
Pages : 14
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Book Description
This paper provides the first comprehensive study of expected firm (unlevered equity) returns. After accounting for the debt component of the firm return, I find that many of the cross sectional determinants of expected equity returns, such as the book-to-market ratio (value) and recent past equity returns (momentum), are substantially less powerful in explaining expected firm returns. In general, my results suggest that Modigliani and Miller (1958) capital structure effects, not the pricing of the firm's entire asset base, play a major role in understanding many asset pricing regularities observed in the equity markets.
Author: Ruslan Goyenko
Publisher:
ISBN:
Category :
Languages : en
Pages : 55
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Book Description
A number of papers document a strong negative relation between idiosyncratic volatility and risk-adjusted stock returns. Using IHS Markit data on indicative borrowing fees, we show that stocks with high idiosyncratic volatility are far more likely to be hard-to-borrow than stocks with low idiosyncratic volatility. When hard-to-borrow stocks are excluded, the relation between idiosyncratic volatility and stock returns disappears. The relation between idiosyncratic volatility and stocks returns is more accurately described as a relation between being hard-to-borrow and stock returns.
