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36
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 139 (5 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
Predictable Risk and Returns in Emerging Markets
, 1995
"... This article has a number of goals. First, the average or unconditional risk of these equity returns is studied. While previous authors have documented low correlations of the emerging market returns with developed country returns, I test whether adding emerging mar ket assets to the portfolio prob ..."
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Cited by 103 (11 self)
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This article has a number of goals. First, the average or unconditional risk of these equity returns is studied. While previous authors have documented low correlations of the emerging market returns with developed country returns, I test whether adding emerging mar ket assets to the portfolio problem significantly shifts the investment opportunity set. I find that the addition of emerging market assets significantly enhances portfolio opportunities
Conditioning manager alphas on economic information: Another look at the persistence of performance
 Review of Financial Studies
, 1998
"... This article presents evidence on persistence in the relative investment performance of large, institutional equity managers. Similar to existing evidence for mutual funds, we find persistent performance concentrated in the managers with poor priorperiod performance measures. A conditional approach ..."
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Cited by 68 (11 self)
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This article presents evidence on persistence in the relative investment performance of large, institutional equity managers. Similar to existing evidence for mutual funds, we find persistent performance concentrated in the managers with poor priorperiod performance measures. A conditional approach, using timevarying measures of risk and abnormal performance, is better able to detect this persistence and to predict the future performance of the funds than are traditional methods.
Housing collateral, consumption insurance, and risk premia, Working paper
, 2002
"... In a model with housing collateral, the ratio of housing wealth to human wealth shifts the conditional distribution of asset prices and consumption growth. A decrease in house prices reduces the collateral value of housing, increases household exposure to idiosyncratic risk, and increases the condit ..."
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Cited by 58 (2 self)
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In a model with housing collateral, the ratio of housing wealth to human wealth shifts the conditional distribution of asset prices and consumption growth. A decrease in house prices reduces the collateral value of housing, increases household exposure to idiosyncratic risk, and increases the conditional market price of risk. Using aggregate data for the US, we find that a decrease in the ratio of housing wealth to human wealth predicts higher returns on stocks. Conditional on this ratio, the covariance of returns with aggregate risk factors explains eighty percent of the crosssectional variation in annual size and booktomarket portfolio returns. 1
Explaining the Poor Performance of Consumptionbased Asset Pricing Models
 Journal of Finance
, 2000
"... We show that the external habitformation model economy of Campbell and Cochrane ~1999! can explain why the Capital Asset Pricing Model ~CAPM! and its extensions are better approximate asset pricing models than is the standard consumptionbased model. The model economy produces timevarying expect ..."
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Cited by 54 (4 self)
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We show that the external habitformation model economy of Campbell and Cochrane ~1999! can explain why the Capital Asset Pricing Model ~CAPM! and its extensions are better approximate asset pricing models than is the standard consumptionbased model. The model economy produces timevarying expected returns, tracked by the dividendprice ratio. Portfoliobased models capture some of this variation in state variables, which a stateindependent function of consumption cannot capture. Therefore, though the consumptionbased model and CAPM are both perfect conditional asset pricing models, the portfoliobased models are better approximate unconditional asset pricing models. THE DEVELOPMENT OF CONSUMPTIONBASED ASSET PRICING THEORY ranks as one of the major advances in financial economics during the last two decades. The classic papers of Lucas ~1978!, Breeden ~1979!, Grossman and Shiller ~1981!, and Hansen and Singleton ~1982, 1983! show how a simple relation between consumption ...
TwoPass Tests of Asset Pricing Models with Useless Factors
, 1997
"... In this paper we investigate the properties of the standard twopass methodology of testing beta pricing models with misspecified factors. In a setting where a factor is useless, defined as being independent of all the asse t returns, we provide theoretical results and simulation evidence that the s ..."
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Cited by 38 (4 self)
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In this paper we investigate the properties of the standard twopass methodology of testing beta pricing models with misspecified factors. In a setting where a factor is useless, defined as being independent of all the asse t returns, we provide theoretical results and simulation evidence that the secondpass crosssectional regression tends to find the beta risk of the useless factor priced more often than it should. More surprisingly, this misspecification bias exacerbates when the number of time series observations increases. Possible ways of detecting useless factors are also examined. When testing asset pricing models relating risk premiums on assets to their betas, the primary question of interest is whether the beta risk of a particular factor is priced (i.e., whether the estimated risk premium associated with a given factor is significantly di#erent from zero). Black, Jensen, and Scholes (1972) and Fama and MacBeth (1973) develop a twopass methodology in which the beta of each asset with respect to a factor is estimated in a firstpass time series regression, and estimated betas are then used in secondpass crosssectional regressions (CSRs) to estimate the risk premium of the factor. This twopass methodology is very intuitive and has been widely used in the literature. The properties of the test statistics and goodnessoffit measures under the twopass methodology are usually developed under the assumptions that the asset pricing model is correctly specified and that the factors are correctly identified. Shanken (1992) provides an excellent discussion of this twopass methodology, especially the large sample properties of the twopass CSR for the correctly specified model under the assumption that returns are conditionally homoskedastic. Jagannathan and Wa...
Land of Addicts? An Empirical Investigation of HabitBased Asset Pricing Models
, 2003
"... A leading explanation of aggregate stock market behavior suggests that assets are priced as if there were a representative investor whose utility is a power function of the difference between aggregate consumption and a “habit" level, where the habit is some function of lagged and (possibly) contemp ..."
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Cited by 33 (3 self)
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A leading explanation of aggregate stock market behavior suggests that assets are priced as if there were a representative investor whose utility is a power function of the difference between aggregate consumption and a “habit" level, where the habit is some function of lagged and (possibly) contemporaneous consumption. But theory does not provide precise guidelines about the parametric functional relationship between the habit and aggregate consumption. This makes formal estimation and testing challenging; at the same time, it raises an empirical question about the functional form of the habit that best explains asset pricing data. This paper studies the ability of a general class of habitbased asset pricing models to match the conditional moment restrictions implied by asset pricing theory. Our approach is to treat the functional form of the habit as unknown, and to estimate it along with the rest
Financial Markets and the Real Economy
, 2006
"... I survey work on the intersection between macroeconomics and finance. The challenge is to find the right measure of “bad times,” rises in the marginal value of wealth, so that we can understand high average returns or low prices as compensation for assets’ tendency to pay off poorly in “bad times.” ..."
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Cited by 19 (1 self)
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I survey work on the intersection between macroeconomics and finance. The challenge is to find the right measure of “bad times,” rises in the marginal value of wealth, so that we can understand high average returns or low prices as compensation for assets’ tendency to pay off poorly in “bad times.” I survey the literature, covering the timeseries and crosssectional facts, the equity premium, consumptionbased models, general equilibrium models, and labor income/idiosyncratic risk approaches.
The Cost of Equity in Emerging Markets: A Downside Risk Approach.” Emerging Markets Quarterly
, 2000
"... Abstract: Recent empirical evidence has established that a measure of downside risk, the semideviation with respect to the mean, explains the cross section of stock returns in emerging markets, and is a plausible variable to be used in a CAPMtype model to compute costs of equity. The evidence repor ..."
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Cited by 19 (5 self)
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Abstract: Recent empirical evidence has established that a measure of downside risk, the semideviation with respect to the mean, explains the cross section of stock returns in emerging markets, and is a plausible variable to be used in a CAPMtype model to compute costs of equity. The evidence reported in this article indicates that the semideviation also explains the cross section of industry returns in emerging markets, thus adding to the robustness of this measure of downside risk. The evidence in this article also shows that, unlike it is the case across emerging markets, across industries in emerging markets beta is correlated to mean returns. Inés Bardají provided valuable research assistance. The views expressed below and any errors that may remain are entirely my own.
A WellConditioned Estimator For Large Dimensional Covariance Matrices
 J. Multiv. Anal
, 1996
"... Many economic problems require a covariance matrix estimator that is not only invertible, but also wellconditioned (i.e. inverting it does not amplify estimation error). For largedimensional covariance matrices, the usual estimator  the sample covariance matrix  is typically not wellcondition ..."
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Cited by 18 (1 self)
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Many economic problems require a covariance matrix estimator that is not only invertible, but also wellconditioned (i.e. inverting it does not amplify estimation error). For largedimensional covariance matrices, the usual estimator  the sample covariance matrix  is typically not wellconditioned. This paper introduces an estimator that is both wellconditioned and more accurate than the sample covariance matrix asymptotically. This estimator is distributionfree and has a simple explicit formula that is easy to compute and interpret. It is the asymptotically optimal linear combination of the sample covariance matrix with the identity matrix. Optimality is meant with respect to a quadratic loss function, asymptotically as the number of observations and the number of variables go to infinity together. Extensive MonteCarlo confirm that all asymptotic results hold well in finite sample. Keywords: portfolio selection, generalized least squares, generalized method of moments, positiv...