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25
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 ..."
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Cited by 137 (4 self)
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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
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 ..."
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Cited by 35 (1 self)
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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
The Capital Asset Pricing Model: Theory and Evidence
 JOURNAL OF ECONOMIC PERSPECTIVES—VOLUME 18, NUMBER 3—SUMMER 2004—PAGES 25–46
, 2004
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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 ..."
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Cited by 9 (0 self)
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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
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 ..."
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Cited by 5 (0 self)
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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 ..."
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Cited by 4 (2 self)
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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
Introduction to Asset Pricing Theory and Tests
 in The International Library of Critical Writings in Financial Economics
, 2001
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CAPM, Risk and Portfolio Selection in "Stable" Markets
, 1996
"... Our main purpose in this paper is to derive the generalized equilibrium relationship between risk and return under the assumption that the asset returns follow a joint symmetric ffstable distribution, with 1 ! ff ! 2. In order to justify such an investigation, we start by empirically evidencing th ..."
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Cited by 2 (0 self)
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Our main purpose in this paper is to derive the generalized equilibrium relationship between risk and return under the assumption that the asset returns follow a joint symmetric ffstable distribution, with 1 ! ff ! 2. In order to justify such an investigation, we start by empirically evidencing the fractal structure of stocks market through extensive tests of selfsimilarity and stability. These tests allow us to model price changes with ffstable distributions. We then show that equilibrium rates of return on all risky assets are functions of their covariation with the market portfolio. The "stable" CAPM highlights a new measure of the quantity of risk which may be interpreted as a generalized beta coefficient.
Using expectations to test asset pricing models
, 2004
"... We employ analysts’ expected rates of return and provide evidence on the relation between these expectations and firm attributes. The assumption that these expectations are unbiased estimates of marketwide expected rates of return allows us to circumvent the use of realized rates of return and prov ..."
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Cited by 2 (0 self)
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We employ analysts’ expected rates of return and provide evidence on the relation between these expectations and firm attributes. The assumption that these expectations are unbiased estimates of marketwide expected rates of return allows us to circumvent the use of realized rates of return and provide evidence on the predictions emanating from traditional asset pricing models. We find a positive and robust relation between expected return and market beta and a
Quantifying Fluctuations in Economic Systems By Adapting Methods of Statistical Physics
, 2000
"... The emerging sub#eld of econophysics explores the degree to which certain concepts and methods from statistical physics can be appropriately modi#ed and adapted to provide new insights into questions that have been the focus of interest in the economics community. Here we give a brief overview of tw ..."
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Cited by 1 (0 self)
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The emerging sub#eld of econophysics explores the degree to which certain concepts and methods from statistical physics can be appropriately modi#ed and adapted to provide new insights into questions that have been the focus of interest in the economics community. Here we give a brief overview of two examples of research topics that are receiving recent attention. A #rst topic is the characterization of the dynamics of stock price #uctuations. For example, we investigate the relation between trading activity  measured by the number of transactions N#t  and the price change G#t for a given stock, over a time interval [t; t +#t]. We relate the timedependent standard deviation of price #uctuations  volatility  to two microscopic quantities: the number of transactions N#t in #t and the variance W #t of the price changes for all transactions in #t. Our work indicates that while the pronounced tails in the distribution of price #uctuations arise from W#t , the longrange correlations found in G#t  are largely due to N#t .We also investigate the relation between price #uctuations and the number of shares Q#t traded in #t. We #nd that the distribution of Q#t is consistent with a stable L#evy distribution, suggesting aL#evy scaling relationship between Q#t and N#t , which would provide one explanation for volumevolatility comovement. A second topic concerns crosscorrelations between the price #uctuations of di#erent stocks. We adapt a conceptual framework, random matrix theory (RMT), #rst used in physics to interpret statistical properties of nuclear energy spectra. RMT makes predictions for the statistical properties of matrices that are universal, that is, do not depend on the interactions between the elements comprising the system. In physics systems, deviat...