Results 1  10
of
55
A Simple Model of Capital Market Equilibrium with Incomplete Information
 Journal of Finance
, 1987
"... The sphere of modern financial economics encompases finance, micro investment theory and much of the economics of uncertainty. As is evident from its influence on other branches of economics including public finance, industrial organization and monetary theory, the boundaries of this sphere are both ..."
Abstract

Cited by 459 (2 self)
 Add to MetaCart
The sphere of modern financial economics encompases finance, micro investment theory and much of the economics of uncertainty. As is evident from its influence on other branches of economics including public finance, industrial organization and monetary theory, the boundaries of this sphere are both permeable and flexible. The complex interactions of time and uncertainty guarantee intellectual challenge and intrinsic excitement to the study of financial economics. Indeed, the mathematics of the subject contain some of the most interesting applications of probability and optimization theory. But for all its mathematical refinement, the research has nevertheless had a direct and significant influence on practice. It was not always thus. Thirty years ago, finance theory was little more than a collection of anecdotes, rules of thumb, and manipulations of accounting data with an almost exclusive focus on corporate financial management. There is no need in this meeting of the guild to recount the subsequent evolution from this conceptual potpourri to a rigorous economic
Resurrecting the (C)CAPM: A CrossSectional Test When Risk Premia Are TimeVarying
 Journal of Political Economy
, 2001
"... This paper explores the ability of conditional versions of the CAPM and the consumption CAPM—jointly the (C)CAPM—to explain the cross section of average stock returns. Central to our approach is the use of the log consumption–wealth ratio as a conditioning variable. We demonstrate that such conditio ..."
Abstract

Cited by 169 (6 self)
 Add to MetaCart
(Show Context)
This paper explores the ability of conditional versions of the CAPM and the consumption CAPM—jointly the (C)CAPM—to explain the cross section of average stock returns. Central to our approach is the use of the log consumption–wealth ratio as a conditioning variable. We demonstrate that such conditional models perform far better than unconditional specifications and about as well as the FamaFrench threefactor model on portfolios sorted by size and booktomarket characteristics. The conditional consumption CAPM can account for the difference in returns between lowbooktomarket and highbooktomarket portfolios and exhibits little evidence of residual size or booktomarket effects. We are grateful to Eugene Fama and Kenneth French for graciously providing the
The Capital Asset Pricing Model: Theory and Evidence
 JOURNAL OF ECONOMIC PERSPECTIVES—VOLUME 18, NUMBER 3—SUMMER 2004—PAGES 25–46
, 2004
"... ..."
On the estimation of beta pricing models
 Review of Financial Studies
, 1992
"... An integrated econometric view of maximum likelihood methods and more traditional twopass approaches to estimating betapricing models is presented. Several aspects of the wellknown “errorsinvariables problem ” are considered, and an earlier conjecture concerning the merits of simultaneous estim ..."
Abstract

Cited by 50 (1 self)
 Add to MetaCart
An integrated econometric view of maximum likelihood methods and more traditional twopass approaches to estimating betapricing models is presented. Several aspects of the wellknown “errorsinvariables problem ” are considered, and an earlier conjecture concerning the merits of simultaneous estimation of beta and price of risk parameters is evaluated. The traditional inference procedure is found, under standard assumptions, to overstate the precision of price of risk estimates and an asymptotically valid correction is derived. Modifications to accommodate serial correlation in marketwide factors are also discussed Sharpe (1964) and Lintner (1965) demonstrate that, in equilibrium, a financial asset’s expected return must be positively linearly related to its “beta, ” a measure of systematic risk or comovement with the market portfolio return: 1 This article is an extension of the second chapter of my doctoral dissertation at Carnegie Mellon University. Recent versions were presented in seminars
Expected returns, yield spreads, and asset pricing tests. SSRN Working Paper
, 2004
"... We use information contained in yield spreads to recover investors ’ ex ante required rates of return on corporate securities, and then use these ex ante returns to study the pricing of risky assets. Differently from the standard approach, our asset pricing tests do not rely on the use of ex post av ..."
Abstract

Cited by 14 (0 self)
 Add to MetaCart
We use information contained in yield spreads to recover investors ’ ex ante required rates of return on corporate securities, and then use these ex ante returns to study the pricing of risky assets. Differently from the standard approach, our asset pricing tests do not rely on the use of ex post average equity returns as proxies for expected equity returns. We find that: (i) the market beta plays a significant role in the crosssection of expected equity returns, and its role persists even after size and booktomarket factors are accounted for; (ii) the risk premia associated with size and booktomarket are positive, significant, and countercyclical; and (iii) there is little evidence on positive momentum profits. We also find that systematic risk, as captured by common equity factors, is the main driver of the crosssectional variation in bond yield spreads. JEL Classification: G12, E44
Is Default Risk Negatively Related to Stock Returns?, working paper
, 2007
"... In contrast to theoretical arguments suggesting a positive riskreturn relation, financially distressed stocks have delivered anomalously low returns during the post1980 period. We argue that detecting the true defaultriskreturn relation using realized returns as a proxy for expected returns is ..."
Abstract

Cited by 11 (1 self)
 Add to MetaCart
In contrast to theoretical arguments suggesting a positive riskreturn relation, financially distressed stocks have delivered anomalously low returns during the post1980 period. We argue that detecting the true defaultriskreturn relation using realized returns as a proxy for expected returns is a challenging task in small samples. Using implied cost of capital computed from analysts forecasts as a measure of exante expected returns, we find an economically and statistically significant positive relation between defaultrisk and expected returns. Extending the sample period back to 1953, we show that there is no anomalous negative relation between defaultrisk and realized returns during the pre1980 period. Our evidence suggests that investors expected positive returns for bearing defaultrisk, but in the post1980 period, especially in the decade of 1980, they were negatively surprised.
The CAPM: Theory and Evidence
, 2003
"... ... marks the birth of asset pricing theory (resulting in a Nobel Prize for Sharpe in 1990). Before their breakthrough, there were no asset pricing models built from first principles about the nature of tastes and investment opportunities and with clear testable predictions about risk and return. Fo ..."
Abstract

Cited by 7 (0 self)
 Add to MetaCart
... marks the birth of asset pricing theory (resulting in a Nobel Prize for Sharpe in 1990). Before their breakthrough, there were no asset pricing models built from first principles about the nature of tastes and investment opportunities and with clear testable predictions about risk and return. Four decades later, the CAPM is still widely used in applications, such as estimating the cost of equity capital for firms and evaluating the performance of managed portfolios. And it is the centerpiece, indeed often the only asset pricing model taught in MBA level investment courses. The attraction of the CAPM is its powerfully simple logic and intuitively pleasing predictions about how to measure risk and about the relation between expected return and risk. Unfortunately, perhaps because of its simplicity, the empirical record of the model is poor – poor enough to invalidate the way it is used in applications. The model’s empirical problems may reflect true failings. (It is, after all, just a model.) But they may also be due to shortcomings of the empirical tests, most notably, poor proxies for the market portfolio of invested wealth, which plays a central role in the model’s predictions. We argue, however, that if the market proxy problem invalidates tests of the model, it also invalidates most applications, which typically borrow the market proxies used in empirical tests. For perspective on the CAPM’s predictions about risk and expected return, we begin with a brief
The implied cost of capital: A new approach
 Journal of Accounting and Economics
, 2012
"... We propose a new approach to estimate the implied cost of capital (ICC). Our approach is distinct from prior studies in that we do not rely on analysts ’ earnings forecasts to compute the ICC. Instead, we use a crosssectional model to forecast the earnings of individual firms. Our approach has two ..."
Abstract

Cited by 6 (0 self)
 Add to MetaCart
(Show Context)
We propose a new approach to estimate the implied cost of capital (ICC). Our approach is distinct from prior studies in that we do not rely on analysts ’ earnings forecasts to compute the ICC. Instead, we use a crosssectional model to forecast the earnings of individual firms. Our approach has two major advantages. First, it allows us to estimate the ICC for a much larger sample of firms over a much longer time period. Second, it is not affected by the various issues that lead to the welldocumented biases in analysts ’ forecasts. Our crosssectional earnings model delivers earnings forecasts that outperform consensus analyst forecasts. We show that, as a result, our approach to estimate the ICC produces a more reliable proxy for expected returns than other approaches. We present evidence on the implications for the equity premium and a variety of asset pricing anomalies.
On the CrossSectional Relation Between Expected Returns, Betas and Size
 Journal of Finance
, 1999
"... In this paper, I set up scenarios where the meanvariance capital asset pricing model is true and where it is false. Then I investigate whether the coefficients from regressions of population expected excess returns on population betas, and expected excess returns on betas and size, allow us to dist ..."
Abstract

Cited by 6 (2 self)
 Add to MetaCart
In this paper, I set up scenarios where the meanvariance capital asset pricing model is true and where it is false. Then I investigate whether the coefficients from regressions of population expected excess returns on population betas, and expected excess returns on betas and size, allow us to distinguish between the scenarios. I show that the coefficients from either ordinary least squares or generalized least squares regressions do not allow us to tell whether the model is true or false. EACH OF THE FOLLOWING FIVE statements has implications for how we might judge whether the Sharpe ~1964!–Lintner ~1965! meanvariance capital asset pricing model ~MV CAPM! is true or false. First, the market portfolio is MV efficient. Second, there is at least one positively weighted efficient portfolio. Third, in the riskless asset version of the model, the market portfolio is the tangency portfolio—it is the point of tangency between a ray emanating from the riskless interest rate and the minimumvariance frontier of