Reformulated Asset Pricing Models
Reformulated Asset Pricing Models

Author: Zhongzhi Lawrence He

Publisher:

Published: 2002

Total Pages: 0

ISBN-13:

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The dissertation consists of three essays that address both the theoretical and empirical aspects of characteristics-based asset pricing models. In the first essay, we reformulate a characteristics-based model to demonstrate why firm characteristics explain cross-sectional expected returns. The model is based on an economic setting where the fully-rational group of investors adopts contrarian strategies against the quasi-rational group of investors. The key result is a parsimonious cross-sectional equation that is not only specified by the risk-return relationship, but is also determined by both market-wide and firm-specific adjustments. We offer consistent explanations for the behaviors of growth and value stocks, and also for the prominent cross-sectional patterns such as book-to-market, earnings-to-price, and size effects. In the second essay, we reformulate an asset pricing model where liquidity is an endogenous determinant of expected returns. The key result is that a firm's expected return can be explained by three components: an interest rate term that includes a market-average expected liquidity, a market risk term determined by a weighted average consumption beta, and a firm-specific term determined by a linear deviation of the firm's expected liquidity from that of the market portfolio. We test various empirical implications derived from the theory and find that the expected liquidity effect and the size effect are significant, but the risk-return relationship is flat in the Canadian market. In the third essay, we propose a characteristics-based asset-pricing model from an ex post perspective. We examine the widely used empirical procedure that groups stocks into portfolios by sorting firm characteristics, showing that the exhibited systematic patterns may be largely due to the way of forming portfolios. We design a new portfolio approach and perform robustness tests for the cross-sectional relationships between risk, liquidity, and returns using Canadian stock market data. We find a strong liquidity-return relationship and a significant risk-return relationship when conditioning on realized returns. Both the risk effect and the liquidity effect are highly robust across different portfolio formations.

Towards Reformulation of The Capital Asset Pricing Model (CAPM) Focusing on Idiosyncratic Risk and Roll's Meta-Analysis
Towards Reformulation of The Capital Asset Pricing Model (CAPM) Focusing on Idiosyncratic Risk and Roll's Meta-Analysis

Author: Edward J. Lusk

Publisher:

Published: 2012

Total Pages:

ISBN-13:

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Understanding idiosyncratic risk represents the next important challenge in the evolution of the Capital Asset Pricing Model [CAPM]. After years of trying to fine tune this simple and elegant model, research is now being focused on the filtered output of the CAPM- the residuals. The reason is simple: the CAPM provides some indicator information but falls far short of explaining, in a predictive sense, asset returns in the trading markets. This then rationalizes the next step that is focused on Knight's concept of uncertainty as this is the model characterization of the residuals of the CAPM. Given the insightful analysis of Roll (1988), where, in terms of R2, the CAPM explains less than 50 per cent of the relative linear movement of the firm's returns relative to those of the market, it is clear that the next analytic issue to be addressed is to sort out the structure of the residuals of the CAPM. This has now resulted in the collection of information that tries to explain or give structure to the uncertainty represented by these residuals. After a summary of the relevant literature where the collection of such information has been reported, we report on the analysis of the corporate social responsibility [CSR] dimension of a firm's market profile. We find that the CSR aspect does indeed provide additional information useful in understanding idiosyncratic risk within the context of the CAPM.

Asset Pricing
Asset Pricing

Author: Bing Cheng

Publisher: World Scientific

Published: 2008

Total Pages: 91

ISBN-13: 9812704558

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Modern asset pricing models play a central role in finance and economic theory and applications. This book introduces a structural theory to evaluate these asset pricing models and throws light on the existence of Equity Premium Puzzle. Based on the structural theory, some algebraic (valuation-preserving) operations are developed in asset spaces and pricing kernel spaces. This has a very important implication leading to practical guidance in portfolio management and asset allocation in the global financial industry. The book also covers topics, such as the role of over-confidence in asset pricing modeling, relationship of the portfolio insurance with option and consumption-based asset pricing models, etc.

Empirical Asset Pricing
Empirical Asset Pricing

Author: Wayne Ferson

Publisher: MIT Press

Published: 2019-03-26

Total Pages: 497

ISBN-13: 0262351307

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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.

Multi-moment Asset Allocation and Pricing Models
Multi-moment Asset Allocation and Pricing Models

Author: Emmanuel Jurczenko

Publisher: John Wiley & Sons

Published: 2006-10-27

Total Pages: 274

ISBN-13:

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While mainstream financial theories and applications assume that asset returns are normally distributed and individual preferences are quadratic, the overwhelming empirical evidence shows otherwise. Indeed, most of the asset returns exhibit “fat-tails” distributions and investors exhibit asymmetric preferences. These empirical findings lead to the development of a new area of research dedicated to the introduction of higher order moments in portfolio theory and asset pricing models. Multi-moment asset pricing is a revolutionary new way of modeling time series in finance which allows various degrees of long-term memory to be generated. It allows risk and prices of risk to vary through time enabling the accurate valuation of long-lived assets. This book presents the state-of-the art in multi-moment asset allocation and pricing models and provides many new developments in a single volume, collecting in a unified framework theoretical results and applications previously scattered throughout the financial literature. The topics covered in this comprehensive volume include: four-moment individual risk preferences, mathematics of the multi-moment efficient frontier, coherent asymmetric risks measures, hedge funds asset allocation under higher moments, time-varying specifications of (co)moments and multi-moment asset pricing models with homogeneous and heterogeneous agents. Written by leading academics, Multi-moment Asset Allocation and Pricing Models offers a unique opportunity to explore the latest findings in this new field of research.

A Review of Capital Asset Pricing Models
A Review of Capital Asset Pricing Models

Author: Don U. A. Galagedera

Publisher:

Published: 2006

Total Pages: 22

ISBN-13:

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This paper provides a review of the main features of asset pricing models. The review includes single-factor and multi-factor models, extended forms of the Capital Asset Pricing Model (CAPM) with higher-order co-moments and asset pricing models conditional on time varying volatility models.

Financial Asset Pricing Theory
Financial Asset Pricing Theory

Author: Claus Munk

Publisher: Oxford University Press, USA

Published: 2013-04-18

Total Pages: 598

ISBN-13: 0199585490

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The book presents models for the pricing of financial assets such as stocks, bonds, and options. The models are formulated and analyzed using concepts and techniques from mathematics and probability theory. It presents important classic models and some recent 'state-of-the-art' models that outperform the classics.