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34
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 231 (10 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
Expectations Hypotheses Tests
 Journal of Finance
, 2001
"... We investigate the Expectations Hypotheses of the term structure of interest rates and of the foreign exchange market using vector autoregressive methods for the U.S. dollar, Deutsche mark, andBritishpoundinterestratesandexchangerates. InadditiontostandardWaldtests,we formulate Lagrange Multiplier a ..."
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Cited by 37 (2 self)
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We investigate the Expectations Hypotheses of the term structure of interest rates and of the foreign exchange market using vector autoregressive methods for the U.S. dollar, Deutsche mark, andBritishpoundinterestratesandexchangerates. InadditiontostandardWaldtests,we formulate Lagrange Multiplier and Distance Metric tests which require estimation under the nonlinear constraints of the null hypotheses. Estimation under the null is achieved by iterating on approximate solutions that require only matrix inversions. We use a biascorrected, constrained vector autoregression as a data generating process and construct extensive Monte Carlo simulations of the various test statistics under the null hypotheses. Wald tests suffer from severe size distortions and use of the asymptotic critical values results in gross overrejection of the null. The Lagrange Multiplier tests slightly underreject the null, and the Distance Metric tests overreject. Use of the small sample distributions of the different tests leads to a common interpretation of the validity of the Expectations Hypotheses. The evidence against the Expectations Hypotheses for these interest rates and exchange rates is much less strong than under asymptotic inference. 2 According to the Expectations Hypothesis, information in current interest rates provides the
Estimation of dsge models when the data are persistent
, 2007
"... Dynamic Stochastic General Equilibrium (DSGE) models are often solved and estimated under specific assumptions as to whether the exogenous variables are difference or trend stationary. However, even mild departures of the data generating process from these assumptions can severely bias the estimates ..."
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Cited by 13 (0 self)
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Dynamic Stochastic General Equilibrium (DSGE) models are often solved and estimated under specific assumptions as to whether the exogenous variables are difference or trend stationary. However, even mild departures of the data generating process from these assumptions can severely bias the estimates of the model parameters. This paper proposes new estimators that do not require researchers to take a stand on whether shocks have permanent or transitory effects. These procedures have two key features. First, the same filter is applied to both the data and the model variables. Second, the filtered variables are stationary when evaluated at the true parameter vector. The estimators are approximately normally distributed not only when the shocks are mildly persistent, but also when they have near or exact unit roots. Simulations show that these robust estimators perform well especially when the shocks are highly persistent yet stationary. In such cases, linear detrending and first differencing are shown to yield biased or imprecise estimates.
Testing for a forward looking Phillips Curve. Additional evidence from European and US Data. Economic Modelling 22
, 2005
"... Les Notes d'Études et de Recherche reflètent les idées personnelles de leurs auteurs et n'expriment pas nécessairement la position de la Banque de France. This document is available on the Banque de France Website « www.banquefrance.fr ». ..."
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Cited by 8 (0 self)
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Les Notes d'Études et de Recherche reflètent les idées personnelles de leurs auteurs et n'expriment pas nécessairement la position de la Banque de France. This document is available on the Banque de France Website « www.banquefrance.fr ».
The Term Structure with Highly Persistent Interest Rates
, 1998
"... If yields are assumed to have an exact unitroot, it has previously been shown that the rational expectations hypothesis of the term structure (REHTS) has been rejected by singleequation tests. However, small deviations from exact unitroot produce substantial changes in the small sample distributi ..."
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Cited by 7 (1 self)
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If yields are assumed to have an exact unitroot, it has previously been shown that the rational expectations hypothesis of the term structure (REHTS) has been rejected by singleequation tests. However, small deviations from exact unitroot produce substantial changes in the small sample distributions of those tests and the normal approximation is no longer satisfactory. We assume that the yield of 1period zerocoupon bond follows a localtounity process with parameter c (c=0 for exact unit root) and use asymptotics to derive alternative distributions, which are far better approximations to ...finite sample distributions. Those asymptotic distributions depend crucially on c, and that allows us to analyze the impact of small deviations from unitroot on the distribution of the tests. Interestingly, for small values of c, the results obtained in the data do not imply a rejection of the REHTS. The above results are useful only when c is known or consistently estimable. Thus, the REHTS ...
Inference in regression models with many regressors
 Journal of Econometrics
, 2012
"... We investigate the behavior of various standard and modified F, LR and LM tests in linear homoskedastic regressions, adapting an alternative asymptotic framework where the number of regressors and possibly restrictions grows proportionately to the sample size. When restrictions are not numerous, the ..."
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Cited by 6 (0 self)
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We investigate the behavior of various standard and modified F, LR and LM tests in linear homoskedastic regressions, adapting an alternative asymptotic framework where the number of regressors and possibly restrictions grows proportionately to the sample size. When restrictions are not numerous, the rescaled classical test statistics are asymptotically chisquared irrespective of whether there are many or few regressors. However, when restrictions are numerous, standard asymptotic versions of classical tests are invalid. We propose and analyze asymptotically valid versions of the classical tests, including those that are robust to the numerosity of regressors and restrictions. The local power of all asymptotically valid tests under consideration turns out to be equal. The “exact ” F test that appeals to critical values of the F distribution is also asymptotically valid and robust to the numerosity of regressors and restrictions.
Finite Sample Properties of EMM, GMM, QMLE, and MLE for a SquareRoot Interest Rate Diffusion Model
, 2001
"... This paper performs a Monte Carlo study on Ecient Method of Moments (EMM), Generalized Method of Moments (GMM), QuasiMaximum Likelihood Estimation (QMLE), and Maximum Likelihood Estimation (MLE) for a continuoustime squareroot model under two challenging scenarios  high persistence in mean and s ..."
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Cited by 4 (0 self)
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This paper performs a Monte Carlo study on Ecient Method of Moments (EMM), Generalized Method of Moments (GMM), QuasiMaximum Likelihood Estimation (QMLE), and Maximum Likelihood Estimation (MLE) for a continuoustime squareroot model under two challenging scenarios  high persistence in mean and strong conditional volatility  that are commonly found in estimating the interest rate process. MLE turns out to be the most eficient of the four methods, but its finite sample inference and convergence rate suffer severely from approximating the likelihood function, especially in the scenario of highly persistent mean. QMLE comes second in terms of estimation efficiency, but it is the most reliable in generating inferences. GMM with lagaugmented moments has overall the lowest estimation efficiency, possibly due to the ad hoc choice of moment conditions. EMM shows an accelerated convergence rate in the high volatility scenario, while its overrejection bias in the mean persistence scenario is unacceptab...
Can We Really Observe Hyperbolic Discounting?
, 2002
"... This paper proposes a new, more robust, experiment to test for the presence of hyperbolic discounting. Recently, a growing literature has studied intertemporal choice when individuals discount the future hyperbolically. These preferences generate dynamically inconsistent choices, in contrast with th ..."
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Cited by 4 (0 self)
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This paper proposes a new, more robust, experiment to test for the presence of hyperbolic discounting. Recently, a growing literature has studied intertemporal choice when individuals discount the future hyperbolically. These preferences generate dynamically inconsistent choices, in contrast with the usual assumption of exponential discounting, where this issue cannot arise. Hyperbolic discounting is justified based on experimental evidence of individual selfcontrol problems. We argue that this interpretation depends crucially on the absence of uncertainty. We show that, once uncertainty is included, the observed behavior is compatible with exponential discounting. We then test for the presence of hyperbolic discounting in a new experiment that controls for uncertainty. The experiment offers two choice sets, the second being a strict subset of the first. Exponential discounters will (possibly weakly) prefer the largest one. Hyperbolic discounters, in contrast, will (strictly) prefer the second set because its design makes it equivalent to a commitment technology. The experiment is conducted...
Predicting dividends in loglinear present value models, PacificBasin Finance
 Journal
, 2012
"... dividend growth, timevarying risk premium ..."
The Effect of Relative Wealth Concerns on the Crosssection of Stock Returns ∗
, 2009
"... We test the cross section implications of an asset pricing model where agents have relative wealth concerns with respect to a reference group which we call their peers. The literature suggests two reasons (not mutually exclusive) why investors might want to hedge local risk resulting from relative w ..."
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Cited by 1 (0 self)
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We test the cross section implications of an asset pricing model where agents have relative wealth concerns with respect to a reference group which we call their peers. The literature suggests two reasons (not mutually exclusive) why investors might want to hedge local risk resulting from relative wealth concerns: keeping up with the Joneses preferences and competition for local assets in short supply. In the presence of some market friction, a negative risk premium obtains for the local risk factornondiversifiable wealth of the peers in equilibrium. We study the empirical implications of this model using as peer groups the nine US Census divisions. As a proxy for the local risk factor we use divisional labor income. We find substantial support for the predictions of the model; moreover the effects are stronger in divisions with lower population density. A possible explanation is that the effect of relative wealth concerns is stronger in low density regions because it is easier to identify the wealth of the reference group. Additionally, lower density may imply higher competition for assets in short supply (like human capital) and, therefore, a stronger desire to hedge the corresponding inflationary risk.