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Macroeconomic Risk And The Cross Section Of Stock Returns
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Book Synopsis Macroeconomic Risk and the Cross-Section of Stock Returns by : Tong Suk Kim
Download or read book Macroeconomic Risk and the Cross-Section of Stock Returns written by Tong Suk Kim and published by . This book was released on 2009 with total page 53 pages. Available in PDF, EPUB and Kindle. Book excerpt: We develop a conditional version of the consumption CAPM using the conditioning variable from the cointegrating relation among macroeconomic variables (dividend yield, term spread, default spread, and short-term interest rate). Our conditioning variable has a strong power to predict market excess returns in the presence of the competing predictive variables. In addition, our conditional consumption CAPM performs about as well as the Fama and French (1993) three-factor model in explaining the cross-section of the Fama and French 25 size and book-to-market sorted portfolios. Our specification shows that value stocks are riskier than growth stocks in bad times supporting the risk-based story.
Book Synopsis Macroeconomic Risk and the Cross-Section of Stock Returns by : Jangkoo Kang
Download or read book Macroeconomic Risk and the Cross-Section of Stock Returns written by Jangkoo Kang and published by . This book was released on 2014 with total page 54 pages. Available in PDF, EPUB and Kindle. Book excerpt: We develop a conditional version of the consumption capital asset pricing model (CCAPM) using the conditioning variable from the cointegrating relation among macroeconomic variables (dividend yield, term spread, default spread, and short-term interest rate). Our conditioning variable has a strong power to predict market excess returns in the presence of competing predictive variables. In addition, our conditional CCAPM performs about as well as Fama and French's (1993) three-factor model in explaining the cross-section of the Fama and French 25 size and book-to-market sorted portfolios. Our specification shows that value stocks are riskier than growth stocks in bad times, supporting the risk-based story.
Book Synopsis Empirical Asset Pricing by : Turan G. Bali
Download or read book Empirical Asset Pricing written by Turan G. Bali and published by John Wiley & Sons. This book was released on 2016-02-26 with total page 512 pages. Available in PDF, EPUB and Kindle. Book excerpt: “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.
Book Synopsis Irrational Exuberance Reconsidered by : Mathias Külpmann
Download or read book Irrational Exuberance Reconsidered written by Mathias Külpmann and published by Springer Science & Business Media. This book was released on 2013-03-20 with total page 233 pages. Available in PDF, EPUB and Kindle. Book excerpt: Mathias Külpmann presents a framework to evaluate whether the stock market is in line with underlying fundamentals. The new and revised edition offers an up to date introduction to the controversy between rational asset pricing and behavioural finance. Empirical evidence of stock market overreaction are investigated within the paradigms of rational asset pricing and behavioural finance. Although this monograph will not promise the reader to become a millionaire, it offers a road to obtain a deeper understanding of the forces which drive stock returns. It should be of interest to anyone interested in what drives performance in the stock market.
Download or read book The Sword of Damocles written by Lin Zhu and published by . This book was released on 2023 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Our study presents novel evidence of the pricing effectiveness of sparse macroeconomic risks at the firm level and the underlying economic regimes. Specifically, we employ sparse PCA approach to aggregate macroeconomic variables from the FRED-MD database and obtain the first 8 components, namely, inflation, housing, spreads, production, employment, personal income, yields and credit; and construct the corresponding firm-level macroeconomic risk exposures as the sensitivity of the individual stock returns to the sparse economic component. We have three main findings: (i) these macro betas are materially different from firm fundamentals; (ii) the betas of inflation, production, personal income, yields and credit are strong predictors for future stock returns, and these betas have incremental information beyond micro risks; (iii) both macro and micro evidence of mispricing due to arbitrage frictions and investor sentiment can help explain the macro beta--return relations which display significantly differences across industries.
Book Synopsis The Cross-section of Stock Returns by : Stijn Claessens
Download or read book The Cross-section of Stock Returns written by Stijn Claessens and published by World Bank Publications. This book was released on 1995 with total page 28 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Horizon-Specific Macroeconomic Risks and the Cross-Section of Expected Returns by : Martijn Boons
Download or read book Horizon-Specific Macroeconomic Risks and the Cross-Section of Expected Returns written by Martijn Boons and published by . This book was released on 2017 with total page 62 pages. Available in PDF, EPUB and Kindle. Book excerpt: We show that decomposing macroeconomic risks across horizon is key to uncover a tight link between risk premia and the real economy. Exposure in four-year returns to innovations in macroeconomic growth and volatility with a matching half-life of over four years is priced in a wide variety of test assets. Shorter-term risks are not priced. Importantly, we show that long-term growth and volatility capture largely common risk. We then propose a single, long-term, macroeconomic risk factor which drives out standard long-run risk measures and performs similar to the Fama-French three-factor model in cross-sectional tests. Our empirical results strongly support the use of long-horizon betas to measure macroeconomic risks in asset returns.
Book Synopsis Financial Markets and the Real Economy by : John H. Cochrane
Download or read book Financial Markets and the Real Economy written by John H. Cochrane and published by Now Publishers Inc. This book was released on 2005 with total page 117 pages. Available in PDF, EPUB and Kindle. Book excerpt: Financial Markets and the Real Economy reviews the current academic literature on the macroeconomics of finance.
Book Synopsis A Macroeconomic Hedge Portfolios and the Cross-Section of Stock Returns by : Maximilian Renz
Download or read book A Macroeconomic Hedge Portfolios and the Cross-Section of Stock Returns written by Maximilian Renz and published by . This book was released on 2018 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper proposes a zero-investment portfolio that can be used to hedge against unexpected changes in the state of the economy. The so-called “macroeconomic hedge portfolio” (MHP) is formed based on a stock's hedging ability, which we derive from a stock's price reaction to important scheduled macroeconomic news. This portfolio earns a positive risk premium over time and a similar premium when used as a risk factor in an asset pricing model. A model that includes the MHP along with the market factor can explain the cross-section of stock returns about as well as the factor models of Fama and French (1993, 2014). Furthermore, our results provide a possible risk-based explanation for the roles of the characteristic-sorted Fama-French factors: they are, to some extent, compensation for higher exposure to the risk related to unexpected changes in the state of the economy. When the MHP is present in a model, the Fama-French factors lose much of their ability to explain the cross-section of stock returns.
Book Synopsis Cointegration, Causality, and Forecasting by : Halbert White
Download or read book Cointegration, Causality, and Forecasting written by Halbert White and published by Oxford University Press, USA. This book was released on 1999 with total page 512 pages. Available in PDF, EPUB and Kindle. Book excerpt: A collection of essays in honour of Clive Granger. The chapters are by some of the world's leading econometricians, all of whom have collaborated with and/or studied with both) Clive Granger. Central themes of Granger's work are reflected in the book with attention to tests for unit roots and cointegration, tests of misspecification, forecasting models and forecast evaluation, non-linear and non-parametric econometric techniques, and overall, a careful blend of practical empirical work and strong theory. The book shows the scope of Granger's research and the range of the profession that has been influenced by his work.
Book Synopsis Value Effect and Macroeconomic Risk by : Cathy Cao
Download or read book Value Effect and Macroeconomic Risk written by Cathy Cao and published by . This book was released on 2016 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We study to what extent macroeconomic risk drives the positive cross-sectional relation between future stock returns and relative firm value, such as book-to-market ratio and earnings-to-price ratio. We provide evidence that value stocks are risker than growth stocks. We show that value stocks have higher risk loadings than growth stocks on the growth rate of industrial production, the term premium, and the default premium. We also show that the risk loadings and risk premiums estimated with respect to Chen, Roll, and Ross [1986] factors account for more than half of the average return spreads between value portfolios and growth portfolios. Our evidence suggests that risk plays an important role in explaining the value effect. Our results provide implications to value and growth investment.
Book Synopsis Strategic Asset Allocation by : John Y. Campbell
Download or read book Strategic Asset Allocation written by John Y. Campbell and published by OUP Oxford. This book was released on 2002-01-03 with total page 272 pages. Available in PDF, EPUB and Kindle. Book excerpt: Academic finance has had a remarkable impact on many financial services. Yet long-term investors have received curiously little guidance from academic financial economists. Mean-variance analysis, developed almost fifty years ago, has provided a basic paradigm for portfolio choice. This approach usefully emphasizes the ability of diversification to reduce risk, but it ignores several critically important factors. Most notably, the analysis is static; it assumes that investors care only about risks to wealth one period ahead. However, many investors—-both individuals and institutions such as charitable foundations or universities—-seek to finance a stream of consumption over a long lifetime. In addition, mean-variance analysis treats financial wealth in isolation from income. Long-term investors typically receive a stream of income and use it, along with financial wealth, to support their consumption. At the theoretical level, it is well understood that the solution to a long-term portfolio choice problem can be very different from the solution to a short-term problem. Long-term investors care about intertemporal shocks to investment opportunities and labor income as well as shocks to wealth itself, and they may use financial assets to hedge their intertemporal risks. This should be important in practice because there is a great deal of empirical evidence that investment opportunities—-both interest rates and risk premia on bonds and stocks—-vary through time. Yet this insight has had little influence on investment practice because it is hard to solve for optimal portfolios in intertemporal models. This book seeks to develop the intertemporal approach into an empirical paradigm that can compete with the standard mean-variance analysis. The book shows that long-term inflation-indexed bonds are the riskless asset for long-term investors, it explains the conditions under which stocks are safer assets for long-term than for short-term investors, and it shows how labor income influences portfolio choice. These results shed new light on the rules of thumb used by financial planners. The book explains recent advances in both analytical and numerical methods, and shows how they can be used to understand the portfolio choice problems of long-term investors.
Book Synopsis Monetary Policy Risk and the Cross-Section of Stock Returns by : Erica X. N. Li
Download or read book Monetary Policy Risk and the Cross-Section of Stock Returns written by Erica X. N. Li and published by . This book was released on 2010 with total page 54 pages. Available in PDF, EPUB and Kindle. Book excerpt: The effects of monetary policy shocks on the equity premium and the cross-section of stock returns are analyzed in general equilibrium. Policy shocks affect real stock returns as a result of nominal product price rigidities. Two opposite effects determine the impact of policy shocks on stock returns. A contractionary shock increases the marginal utility of consumption, reduces aggregate output, and increases production markups. The output reduction requires a positive premium in expected returns. The markup increase acts as a consumption hedge and involves a negative premium. Low elasticities of intertemporal substitution of consumption and labor amplify the markup effect and can generate a negative net effect on the equity premium. In the cross-section, a contractionary shock reduces the relative output and expands the relative markup of a more rigid price industry with respect to a more flexible price industry. If the relative markup expansion dominates the relative output decline, the expected stock return of the more flexible price industry is higher than that of the more rigid price one. As the responsiveness of the policy to economic conditions increases, the effects of policy shocks on the equity premium and the cross-section decline. In addition, the policy-induced markup variation generates time variation in expected returns.
Book Synopsis The Cross-section of Volatility and Expected Returns by : Andrew Ang
Download or read book The Cross-section of Volatility and Expected Returns written by Andrew Ang and published by . This book was released on 2004 with total page 55 pages. Available in PDF, EPUB and Kindle. Book excerpt: "We examine the pricing of aggregate volatility risk in the cross-section of stock returns. Consistent with theory, we find that stocks with high sensitivities to innovations in aggregate volatility have low average returns. In addition, we find that stocks with high idiosyncratic volatility relative to the Fama and French (1993) model have abysmally low average returns. This phenomenon cannot be explained by exposure to aggregate volatility risk. Size, book-to-market, momentum, and liquidity effects cannot account for either the low average returns earned by stocks with high exposure to systematic volatility risk or for the low average returns of stocks with high idiosyncratic volatility"--National Bureau of Economic Research web site.
Book Synopsis Essays on Macroeconomic Risks and Stock Prices by : Fernando Manuel Duarte
Download or read book Essays on Macroeconomic Risks and Stock Prices written by Fernando Manuel Duarte and published by . This book was released on 2011 with total page 159 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this thesis, I study the relationship between macroeconomic risks and asset prices. In the first chapter, I establish that inflation risk is priced in the cross-section of stock returns: stocks that have low returns during inflationary times command a risk premium. I estimate a market price of inflation risk that is comparable in magnitude to the price of risk for the aggregate market. Inflation is therefore a key determinant of risk in the cross-section of stocks. The inflation premium cannot be explained by either the Fama-French factors or industry effects. Instead, I argue the premium arises because high inflation lowers expectations of future real consumption growth. To formalize and test this hypothesis, I develop a consumption-based general equilibrium model. The model generates a price of inflation risk consistent with my empirical estimates, while simultaneously matching the joint dynamics of consumption and inflation, the aggregate equity premium, and the level and slope of the yield curve. In the second chapter, with L. Kogan and Dmitry Livdan, we study the relation between returns on the aggregate stock market and aggregate real investment. While it is well known that aggregate investment rate is negatively correlated with subsequent excess stock market returns, we find that it is positively correlated with future stock market volatility. Thus, conditionally on past aggregate investment, the mean-variance tradeoff in aggregate stock returns is negative. We interpret these patterns within a general equilibrium production economy. In our model, investment is determined endogenously in response to two types of shocks: shocks to productivity and preference shocks affecting discount rates. Preference shocks affect expected stock returns, aggregate investment rate, and stock return volatility in equilibrium, helping model reproduce the empirical relations between these variables. Thus, our results emphasize that the time-varying price of aggregate risk plays and important role in shaping the aggregate investment dynamics. In the third chapter, with S. Parsa, we show a novel relation between the institutional investors' intrinsic trading frequency-a commonly used proxy for the investors's investment horizon- and the cross-section of stock returns. We show that the 20% of stocks with the lowest trading frequency earn mean returns that are 6 percentage points per year higher than the 20% of stocks that have the highest trading frequency. The magnitude and predictability of these returns persist or even increase when riskadjusted by common indicators of systematic risks such as the Fama-French, liquidity or momentum factors. Our results show that the characteristics of stockholders affect expected returns of the very securities they hold, supporting the view that heterogeneity among investors is an important dimension of asset prices. JEL classification: E31, E44, G12
Book Synopsis The Level, Slope, and Curve Factor Model for Stocks: Evidence, Theory, and Explanation by : Charles Clarke
Download or read book The Level, Slope, and Curve Factor Model for Stocks: Evidence, Theory, and Explanation written by Charles Clarke and published by . This book was released on 2016 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The reported number of firm characteristics that predict stock returns is growing at a rapid pace. This dissertation offers a reorganization of this exploding space. In the first chapter, I use regressions to aggregate the explanatory power of many anomalies into one proxy for expected returns. I find that sorting on this proxy creates large spreads in average returns and large alphas when compared to the leading factor models. The procedure allows me to evaluate the marginal economic significance of each anomaly. Asset growth, net stock issues and momentum are the strongest anomaly variables. Anomaly importance varies across size groups, but size provides relatively little explanatory power. I use principal components analysis to show that a strong multifactor structure underlies the spreads created from my one dimensional sort. In the second chapter, I develop a method to extract only the priced factors from stock returns. The first step estimates expected returns based on characteristics. The second uses the expected returns to form portfolios. The last step uses principal components to extract factors from the portfolio returns. The procedure isolates and emphasizes the comovement across assets that is related to expected returns as opposed to firm characteristics. It produces three factors--level, slope and curve--which perform as well or better than other leading models. Horse races show that other leading factors add little to the model. The factors have macroeconomic risk interpretations. The third chapter reevaluates the Consumption Capital Asset Pricing Model's ability to price the cross-section of stocks. With a few adjustments that generate more informative tests by increasing test power, I find that the simple linearized CCAPM often matches key features of the cross-section: the consumption risk premium is positive and significant, the zero beta rate is near zero and insignificant, and the CCAPM captures much of the variation across average portfolio returns. A key stylized fact emerges that many interesting ``anomalies'' share the characteristic that high expected return portfolios tend to have higher covariance with consumption.
Book Synopsis Macro Disagreement and the Cross-section of Stock Returns by : Weikai Li
Download or read book Macro Disagreement and the Cross-section of Stock Returns written by Weikai Li and published by . This book was released on 2014 with total page 56 pages. Available in PDF, EPUB and Kindle. Book excerpt:
