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The Predictable And Misleading Consequences When Using Periodic Returns In Traditional Tests Of The Capital Asset Pricing Model
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Book Synopsis The Predictable and Misleading Consequences When Using Periodic Returns in Traditional Tests of the Capital Asset Pricing Model by : Carl R. Schwinn
Download or read book The Predictable and Misleading Consequences When Using Periodic Returns in Traditional Tests of the Capital Asset Pricing Model written by Carl R. Schwinn and published by . This book was released on 2006 with total page 55 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper offers a new understanding of the statistical results obtained by Black, Jensen, and Scholes (1972) and Miller and Scholes (1972) in their tests of the Capital Asset Pricing Model (CAPM). Numerical examples and simulations are used to illustrate how the empirical results of both papers are what we should expect to observe under the null hypothesis that the CAPM does not hold and the returns, either periodic or continuous, are variable. This paper employs geometric Brownian motion (GBM) as a reasonable first-order approximation for the return generating process to capture the predictable, asymmetrical effects of compounding variable returns. The empirical results of the cross-section and time-series tests in both papers can be explained by the simple mathematical dependence of periodic returns upon the underlying variance of the continuously compounded returns. The numerical examples and simulations reproduce the empirical results by matching the variance of the continuously compounded returns on the market factor in the model of GBM to the variance of the returns on the market portfolio in each sample period, although the securities are not priced in the model to reflect aversion to either beta or the variance of the continuously compounded returns.
Book Synopsis Cost of Capital by : Shannon P. Pratt
Download or read book Cost of Capital written by Shannon P. Pratt and published by John Wiley & Sons. This book was released on 2008-02-25 with total page 448 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this long-awaited Third Edition of Cost of Capital: Applications and Examples, renowned valuation experts and authors Shannon Pratt and Roger Grabowski address the most controversial issues and problems in estimating the cost of capital. This authoritative book makes a timely and significant contribution to the business valuation body of knowledge and is an essential part of the expert's library.
Book Synopsis An Investigation and Empirical Test of the Impact of Firm Size on Expected Returns Versus the Returns Predicted by the Capital Asset Pricing Model by : Norman R. Wight
Download or read book An Investigation and Empirical Test of the Impact of Firm Size on Expected Returns Versus the Returns Predicted by the Capital Asset Pricing Model written by Norman R. Wight and published by . This book was released on 1987 with total page 66 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Bias in Estimation of Systematic Risk and Its Implications for Tests of the CAPM by : Puneet Handa
Download or read book Bias in Estimation of Systematic Risk and Its Implications for Tests of the CAPM written by Puneet Handa and published by . This book was released on 1987 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Empirical Asset Pricing by : Wayne Ferson
Download or read book Empirical Asset Pricing written by Wayne Ferson and published by MIT Press. This book was released on 2019-03-12 with total page 497 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.
Book Synopsis Implications of Return Predictability Across Horizons for Asset Pricing Models by : Carlo A. Favero
Download or read book Implications of Return Predictability Across Horizons for Asset Pricing Models written by Carlo A. Favero and published by . This book was released on 2016 with total page 61 pages. Available in PDF, EPUB and Kindle. Book excerpt: We use the evidence on predictability of returns at different horizons to discriminate among competing asset pricing models. Specifically, we employ predictors-based variance bounds, i.e. bounds on the variance of the Stochastic Discount Factors (SDFs) that price a given set of returns conditional on the information contained in a vector of return predictors. We show that return predictability delivers variance bounds that are much tighter than the classical, unconditional Hansen and Jagannathan (1991) bounds. We use the predictors-based bounds to discriminate among three leading classes of asset pricing models: rare disasters, long-run risks and external habit. We find that the rare disasters model of Nakamura, Steinsson, Barro, and Ursua (2013) is the best performer since it satisfies rather comfortably the predictors-based bounds at all horizons. As for long-run risks, while the classical version of Bansal and Yaron (2004) is the model most challenged by the introduction of conditioning information since it struggles to meet the bounds at all horizons, the more general version of Schorfheide, Song, and Yaron (2016), which accounts for multiple volatility components, satisfies the 1- and 5-year bounds as long as the set of test assets includes only equities and T-Bills. The Campbell and Cochrane (1999) habit model lies somehow in the middle: it performs quite well at our longest 5-year horizon while it struggles at the 1-year horizon. Finally, when the set of test assets is augmented with Treasury Bonds, the only model that is able to satisfy the predictors-based bounds is the rare disasters model.
Book Synopsis Some Unintended Consequences of Grouping on Tests of the Capital Asset Pricing Model by : Johannus A. Janmaat
Download or read book Some Unintended Consequences of Grouping on Tests of the Capital Asset Pricing Model written by Johannus A. Janmaat and published by . This book was released on 1996 with total page 138 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Postmodern Portfolio Theory by : James Ming Chen
Download or read book Postmodern Portfolio Theory written by James Ming Chen and published by Springer. This book was released on 2016-07-26 with total page 345 pages. Available in PDF, EPUB and Kindle. Book excerpt: This survey of portfolio theory, from its modern origins through more sophisticated, “postmodern” incarnations, evaluates portfolio risk according to the first four moments of any statistical distribution: mean, variance, skewness, and excess kurtosis. In pursuit of financial models that more accurately describe abnormal markets and investor psychology, this book bifurcates beta on either side of mean returns. It then evaluates this traditional risk measure according to its relative volatility and correlation components. After specifying a four-moment capital asset pricing model, this book devotes special attention to measures of market risk in global banking regulation. Despite the deficiencies of modern portfolio theory, contemporary finance continues to rest on mean-variance optimization and the two-moment capital asset pricing model. The term postmodern portfolio theory captures many of the advances in financial learning since the original articulation of modern portfolio theory. A comprehensive approach to financial risk management must address all aspects of portfolio theory, from the beautiful symmetries of modern portfolio theory to the disturbing behavioral insights and the vastly expanded mathematical arsenal of the postmodern critique. Mastery of postmodern portfolio theory’s quantitative tools and behavioral insights holds the key to the efficient frontier of risk management.
Book Synopsis Skewness of Returns for Regulated Utilities Impact on the Use of the CAPM for Regulatory Rate-setting by : M. Christie McManus
Download or read book Skewness of Returns for Regulated Utilities Impact on the Use of the CAPM for Regulatory Rate-setting written by M. Christie McManus and published by . This book was released on 1985 with total page 100 pages. Available in PDF, EPUB and Kindle. Book excerpt: "The Capital Asset Pricing Model is a two-parameter model used to determine required return for investments. Its use is increasing among regulatory agencies in the rate-setting process for utilities. Since the model depends on only two parameters of the distribution of returns, normality of the distribution is assumed. However this assumption has been disproved by several researchers. Security returns, instead, have been shown to have positive skewness. Other researchers have found evidence of an investor preference for positive skewness in security returns which is not taken into account by the Capital Asset Pricing Model. On the other hand, it has been suggested but not empirically tested that returns of regulated utilities may be skewed to the left by the regulatory process. While gains are limited by the regulatory agency, some losses are not and the risk of such losses has increased in recent years. If returns for regulated utilities are skewed to the left while returns for the market as a whole are skewed to the right and if investors show a preference for this positive skewness the Capital Asset Pricing Model will produce a lower rate than appropriate. This will impair the ability of utilities to raise equity financing and lead to higher debt levels. This study measures whether there is a difference between the returns of regulated utilities and the market as a whole which cannot be captured by the covariance between the two and thus is not accounted for by the CAPM. Annual returns over a five-year period for a sample of regulated utilities and a control group of industrials were used. positive skewness. The results indicate that the returns of the control group of industrials are significantly positively skewed. The utility returns show slight positive skewness but a normal distribution was not rejected. The evidence suggests that the two distributions differ significantly in the degree of skewness though not in the direction. these results suggest that utilities may require higher rates of return than predicted by the Capital Asset Pricing Model"--Document.
Book Synopsis Are Accruals Mispriced? Evidence from Tests of an Intertemporal Capital Asset Pricing Model by : Mozaffar Khan
Download or read book Are Accruals Mispriced? Evidence from Tests of an Intertemporal Capital Asset Pricing Model written by Mozaffar Khan and published by . This book was released on 2007 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper proposes a risk-based explanation for the accrual anomaly. Risk is measured using a four-factor model motivated by the Intertemporal Capital Asset Pricing Model. Tests of the model suggest that a considerable portion of the cross-sectional variation in average returns to high and low accrual firms is explained by risk. The four-factor model also performs better than some other widely used models in pricing a number of different hedge portfolios.
Book Synopsis Predictable Behavior of Security Returns and Tests of Asset Pricing Models by : Narasimhan Jegadeesh
Download or read book Predictable Behavior of Security Returns and Tests of Asset Pricing Models written by Narasimhan Jegadeesh and published by . This book was released on 1987 with total page 139 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis What to Do About a Latent Factor by : Todd Prono
Download or read book What to Do About a Latent Factor written by Todd Prono and published by . This book was released on 2015 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: A new model misspecification measure for linear asset pricing models is proposed. The origins of this measure are in Shanken (1987) and Kandel and Stambaugh (1985, 1995), where it is argued that the true market return is inherently latent and, as a consequence, only ever partially observed. Tests of asset pricing models that rely on the market return as a risk factor and are based, by necessity, on an observable proxy to this factor are then misspecified. The proposed misspecification measure, which assigns an upper bound to the correlation between the true market return and the observable proxy return used to conduct the test, can be estimated entirely and directly from observable data. This measure is suited both for testing models that include the market return as a pricing factor in a traditional sense (i.e., determining whether the given model does or does not price a collection of risky assets) and ranking those models (i.e., gauging which model performs the best). The measure is used to price portfolios reflecting the size, value, and momentum premiums. While neither the conditional CAPM nor the ICAPM is shown to offer any improvement over the simple CAPM, all three models are shown to perform materially better under the proposed measure, with improvements in model fit of as much as 45%. Also, it is discovered that winner stocks in a momentum portfolio may have higher market betas than loser stocks.
Book Synopsis Predictable Behavior of Security Returns and Test of Asset Pricing Models by : Narasimhan Jegadeesh
Download or read book Predictable Behavior of Security Returns and Test of Asset Pricing Models written by Narasimhan Jegadeesh and published by . This book was released on 1987 with total page 278 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Anomalies and Stock Returns by : Philip Gharghori
Download or read book Anomalies and Stock Returns written by Philip Gharghori and published by . This book was released on 2008 with total page 30 pages. Available in PDF, EPUB and Kindle. Book excerpt: Prior research has identified the existence of several cross-sectional patterns in equity returns, commonly referred to as effects. This paper empirically tests for the existence of a number of well known effects using data from the Australian equities market. Specifically, we investigate the size effect, book-to-market effect, earnings to price effect, cash flow to price effect, leverage effect and the liquidity effect. Fama and French (1996) note that patterns in average returns that cannot be explained by the traditional Capital Asset Pricing Model (CAPM) are considered anomalies. An additional aim of this paper is to investigate the capability of the CAPM and the Fama and French (1993) multifactor model (FFM) in explaining any observed anomalies. We document a size, book to market, earnings to price and cash flow to price effect but fail to find evidence of a leverage or liquidity effect. Although our results indicate that the FFM is superior to the CAPM in explaining cross-sectional variation in equity returns, we conclude that its performance is less than satisfactory in Australia.
Book Synopsis Predictability and the Cross-section of Expected Returns by : Christian Schlag
Download or read book Predictability and the Cross-section of Expected Returns written by Christian Schlag and published by . This book was released on 2020 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Many modern macro finance models imply that excess returns on arbitrary assets are predictable via the price-dividend ratio and the variance risk premium of the aggregate stock market. We propose a simple empirical test for the ability of such a model to explain the cross-section of expected returns by sorting stocks based on the sensitivity of expected returns to these quantities. Models with only one uncertainty-related state variable, like the habit model or the long-run risks model, cannot pass this test. However, even extensions with more state variables mostly fail. We derive conditions under which models would be able to produce expected return patterns in line with the data and discuss various examples.
Book Synopsis Finance and the Behavioral Prospect by : James Ming Chen
Download or read book Finance and the Behavioral Prospect written by James Ming Chen and published by Springer. This book was released on 2016-10-01 with total page 350 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book explains how investor behavior, from mental accounting to the combustible interplay of hope and fear, affects financial economics. The transformation of portfolio theory begins with the identification of anomalies. Gaps in perception and behavioral departures from rationality spur momentum, irrational exuberance, and speculative bubbles. Behavioral accounting undermines the rational premises of mathematical finance. Assets and portfolios are imbued with “affect.” Positive and negative emotions warp investment decisions. Whether hedging against intertemporal changes in their ability to bear risk or climbing a psychological hierarchy of needs, investors arrange their portfolios and financial affairs according to emotions and perceptions. Risk aversion and life-cycle theories of consumption provide possible solutions to the equity premium puzzle, an iconic financial mystery. Prospect theory has questioned the cogency of the efficient capital markets hypothesis. Behavioral portfolio theory arises from a psychological account of security, potential, and aspiration.
Book Synopsis Mis-specification of the Capital Asset Pricing Model Tests for Size, Earnings Price and Dividend Yield Effect by : Vipul K. Bansal
Download or read book Mis-specification of the Capital Asset Pricing Model Tests for Size, Earnings Price and Dividend Yield Effect written by Vipul K. Bansal and published by . This book was released on 1988 with total page 294 pages. Available in PDF, EPUB and Kindle. Book excerpt:
