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112
Estimating standard errors in finance panel data sets: Comparing approaches
, 2007
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Equilibrium Cross Section of Returns
"... We construct a dynamic general equilibrium production economy to explicitly link expected stock returns to firm characteristics such as firm size and the booktomarket ratio. Stock returns in the model are completely characterized by a conditional capital asset pricing model (CAPM). Size and bookt ..."
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Cited by 110 (23 self)
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We construct a dynamic general equilibrium production economy to explicitly link expected stock returns to firm characteristics such as firm size and the booktomarket ratio. Stock returns in the model are completely characterized by a conditional capital asset pricing model (CAPM). Size and booktomarket are correlated with the true conditional market beta and therefore appear to predict stock returns. The crosssectional relations between firm characteristics and returns can subsist even after one controls for typical empirical estimates of beta. These findings suggest that the empirical success of size and booktomarket can be consistent with a singlefactor conditional CAPM model. We gratefully acknowledge the helpful comments of Andy Abel, Jonathan Berk, Michael
Why is longhorizon equity less risky? A durationbased explanation of the value premium, NBER working paper
, 2005
"... We propose a dynamic riskbased model that captures the value premium. Firms are modeled as longlived assets distinguished by the timing of cash flows. The stochastic discount factor is specified so that shocks to aggregate dividends are priced, but shocks to the discount rate are not. The model im ..."
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Cited by 90 (18 self)
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We propose a dynamic riskbased model that captures the value premium. Firms are modeled as longlived assets distinguished by the timing of cash flows. The stochastic discount factor is specified so that shocks to aggregate dividends are priced, but shocks to the discount rate are not. The model implies that growth firms covary more with the discount rate than do value firms, which covary more with cash flows. When calibrated to explain aggregate stock market behavior, the model accounts for the observed value premium, the high Sharpe ratios on value firms, and the poor performance of the CAPM. THIS PAPER PROPOSES A DYNAMIC RISKBASED MODEL that captures both the high expected returns on value stocks relative to growth stocks, and the failure of the capital asset pricing model to explain these expected returns. The value premium, first noted by Graham and Dodd (1934), is the finding that assets with a high ratio of price to fundamentals (growth stocks) have low expected returns relative to assets with a low ratio of price to fundamentals (value stocks). This
The value premium
 Journal of Finance
, 2005
"... The value anomaly arises naturally in the neoclassical framework with rational expectations. Costly reversibility and countercyclical price of risk cause assets in place to be harder to reduce, and hence are riskier than growth options especially in bad times when the price of risk is high. By linki ..."
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Cited by 64 (5 self)
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The value anomaly arises naturally in the neoclassical framework with rational expectations. Costly reversibility and countercyclical price of risk cause assets in place to be harder to reduce, and hence are riskier than growth options especially in bad times when the price of risk is high. By linking risk and expected returns to economic primitives, such as tastes and technology, my model generates many empirical regularities in the crosssection of returns; it also yields an array of new refutable hypotheses providing fresh directions for future empirical research. WHY DO VALUE STOCKS EARN HIGHER EXPECTED RETURNS than growth stocks? This appears to be a troublesome anomaly for rational expectations, because according to conventional wisdom, growth options hinge upon future economic conditions and must be riskier than assets in place. In a widely used corporate finance textbook, Grinblatt and Titman (2001, p. 392) contend that “Growth opportunities are usually the source of high betas,..., because growth options tend to be most valuable in good times and have implicit leverage, which tends to increase
Presidential Address: Discount Rates
 Journal of Finance
, 2011
"... Discountrate variation is the central organizing question of current assetpricing research. I survey facts, theories, and applications. Previously, we thought returns were unpredictable, with variation in pricedividend ratios due to variation in expected cashflows. Now it seems all pricedividend ..."
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Cited by 56 (1 self)
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Discountrate variation is the central organizing question of current assetpricing research. I survey facts, theories, and applications. Previously, we thought returns were unpredictable, with variation in pricedividend ratios due to variation in expected cashflows. Now it seems all pricedividend variation corresponds to discountrate variation. We also thought that the crosssection of expected returns came from the CAPM. Now we have a zoo of new factors. I categorize discountrate theories based on central ingredients and data sources. Incorporating discountrate variation affects finance applications, including portfolio theory, accounting, cost of capital, capital structure, compensation, and macroeconomics. ASSET PRICES SHOULD EQUAL expected discounted cashflows. Forty years ago, Eugene Fama (1970) argued that the expected part, “testing market efficiency,” provided the framework for organizing assetpricing research in that era. I argue that the “discounted ” part better organizes our research today. I start with facts: how discount rates vary over time and across assets. I turn
Industry Concentration and Average Stock Returns
 THE JOURNAL OF FINANCE
, 2006
"... Firms in more concentrated industries earn lower returns, even after controlling for size, booktomarket, momentum, and other return determinants. Explanations based on chance, measurement error, capital structure, and persistent insample cash flow shocks do not explain this finding. Drawing on wo ..."
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Cited by 55 (3 self)
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Firms in more concentrated industries earn lower returns, even after controlling for size, booktomarket, momentum, and other return determinants. Explanations based on chance, measurement error, capital structure, and persistent insample cash flow shocks do not explain this finding. Drawing on work in industrial organization, we posit that either barriers to entry in highly concentrated industries insulate firms from undiversifiable distress risk, or firms in highly concentrated industries are less risky because they engage in less innovation, and thereby command lower expected returns. Additional timeseries tests support these riskbased interpretations.
Who Underreacts to CashFlow News? Evidence from Trading between Individuals and Institutions
 Journal of Financial Economics
, 2002
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Estimating the intertemporal riskreturn tradeoff using the implied cost of capital
, 2006
"... We reexamine the timeseries relation between the conditional mean and variance of stock market returns. To proxy for the conditional mean return, we use the implied cost of capital, computed using analyst forecasts. The usefulness of this proxy is shown in simulations. In empirical analysis, we con ..."
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Cited by 43 (3 self)
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We reexamine the timeseries relation between the conditional mean and variance of stock market returns. To proxy for the conditional mean return, we use the implied cost of capital, computed using analyst forecasts. The usefulness of this proxy is shown in simulations. In empirical analysis, we construct the time series of the implied cost of capital for the G7 countries. We find strong support for a positive intertemporal meanvariance relation at both the country level and the world market level. Some of our evidence is consistent with international integration of the G7 financial markets.