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879
The stock market’s reaction to unemployment news. Working paper
, 2001
"... The Stock Market’s Reaction………… We find that on average an announcement of rising unemployment is “good news ” for stocks during economic expansions and “bad news ” during economic contractions. Thus stock prices usually increase on news of rising unemployment, since the economy is usually in an exp ..."
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Cited by 95 (1 self)
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The Stock Market’s Reaction………… We find that on average an announcement of rising unemployment is “good news ” for stocks during economic expansions and “bad news ” during economic contractions. Thus stock prices usually increase on news of rising unemployment, since the economy is usually in an expansion phase. We provide an explanation for this phenomenon. Unemployment news bundles two primitive types of information relevant for valuing stocks: information about future interest rates and future corporate earnings and dividends. A rise in unemployment typically signals a decline in interest rates, which is good news for stocks, as well as a decline in future corporate earnings and dividends, which is bad news for stocks. The nature of the bundle — and hence the relative importance of the two effects — changes over time depending on the state of the economy. For stocks as a group information about interest rates dominates during expansions and information about future corporate earnings dominates during contractions. 3 1.
Term Structure of Interest Rates with Regime Shifts
 Journal of Finance
, 2002
"... We develop a term structure model where the short interest rate and the market price of risks are subject to discrete regime shifts. Empirical evidence from efficient method of moments estimation provides considerable support for the regime shifts model. Standard models, which include affine specifi ..."
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Cited by 95 (2 self)
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We develop a term structure model where the short interest rate and the market price of risks are subject to discrete regime shifts. Empirical evidence from efficient method of moments estimation provides considerable support for the regime shifts model. Standard models, which include affine specifications with up to three factors, are sharply rejected in the data. Our diagnostics show that only the regime shifts model can account for the welldocumented violations of the expectations hypothesis, the observed conditional volatility, and the conditional correlation across yields. We find that regimes are intimately related to business cycles. MANY PAPERS DOCUMENT THAT THE UNIVARIATE short interest rate process can be reasonably well modeled in the time series as a regime switching process ~see Hamilton ~1988!, Garcia and Perron ~1996!!. In addition to this statistical evidence, there are economic reasons as well to believe that regime shifts are important to understanding the behavior of the entire yield curve. For example, business cycle expansion and contraction “regimes ” potentially
A parsimonious macroeconomic model for asset pricing: Habit . . .
, 2003
"... In this paper we study the asset pricing implications of a parsimonious twoagent macroeconomic model with two key features: limited participation in the stock market and heterogeneity in the elasticity of intertemporal substitution. The parameter values for the model are taken from the business cyc ..."
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Cited by 91 (2 self)
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In this paper we study the asset pricing implications of a parsimonious twoagent macroeconomic model with two key features: limited participation in the stock market and heterogeneity in the elasticity of intertemporal substitution. The parameter values for the model are taken from the business cycle literature and are not calibrated to match any financial statistic. Yet, with a risk aversion of two, the model is able to explain a large number of asset pricing phenomena including all the facts matched by the external habit model of Campbell and Cochrane (1999). Examples in this list include a high equity premium and a low riskfree rate; a countercyclical risk premium, volatility and Sharpe ratio; predictable stock returns with coefficients and R2 values of longhorizon regressions matching their empirical counterparts, among others. In addition the model generates a riskfree rate with low volatility (5.7 percent annually) and with high persistence. We also show that the similarity of our results to those from an external habit model is not a coincidence: the model has a reduced form representation which is remarkably similar to Campbell and Cochrane’s framework for asset pricing. However,themacroeconomic implications of the two models are quite different, favoring the limited participation model. Moreover, we show that policy analysis yields dramatically different conclusions in each framework.
From efficient markets theory to behavioral finance
 JOURNAL OF ECONOMIC PERSPECTIVES
, 2003
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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 78 (5 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
The Declining Equity Premium: What Role Does Macroeconomic Risk Play?
 THE REVIEW OF FINANCIAL STUDIES
, 2006
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On the importance of measuring payout yield: Implications for empirical asset pricing
 Journal of Finance
, 2006
"... We investigate the empirical implications of using various measures of payout yield rather than dividend yield for asset pricing models. We find statistically and economically significant predictability in the time series when payout (dividends plus repurchases) and net payout (dividends plus repurc ..."
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Cited by 70 (5 self)
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We investigate the empirical implications of using various measures of payout yield rather than dividend yield for asset pricing models. We find statistically and economically significant predictability in the time series when payout (dividends plus repurchases) and net payout (dividends plus repurchases minus issuances) yields are used instead of the dividend yield. Similarly, we find that payout (net payout) yields contains information about the cross section of expected stock returns exceeding that of dividend yields, and that the high minus low payout yield portfolio is a priced factor. WHILE THE IRRELEVANCE THEOREM of Miller and Modigliani (1961) implies that there is no reason to suspect that dividends play a role in determining equity price levels or equity returns, the theorem is silent on the usefulness of dividends in explaining these variables. It is then, perhaps, not surprising that there is a considerable literature exploiting the properties of dividends and dividend yields to better understand the fundamentals of asset pricing both in the time series and in the cross section. Motivation for the former comes from variations of the Gordon growth model in which dividend yields can be written as the return minus the dividend’s growth rate (see, e.g., Fama and French (1988)), from consumptionbased asset pricing models in which the firm’s dividends covary with aggregate consumption (e.g., Lucas (1978) and Shiller (1981)), and so forth. Additional motivation comes from crosssectional heterogeneity in tax, agency, and asymmetric information considerations (e.g.,
Labor income and predictable stock returns
 Review of Financial Studies
, 2006
"... We propose and test a novel economic mechanism that generates stock return predictability on both the time series and the cross section. In our model, investors’ income has two sources, wages and dividends, that grow stochastically over time. As a consequence, the fraction of total income produced b ..."
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Cited by 65 (2 self)
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We propose and test a novel economic mechanism that generates stock return predictability on both the time series and the cross section. In our model, investors’ income has two sources, wages and dividends, that grow stochastically over time. As a consequence, the fraction of total income produced by wages changes over time depending on economic conditions. We show that as this fraction fluctuates, the risk premium that investors require to hold stocks varies as well. We test the main implications of the model and find substantial support for it. A regression of stock returns on lagged values of the labor income to consumption ratio produces statistically significant coefficients and adjusted R 2 ’s that are larger than those generated when using the dividend price ratio. Tests of the cross sectional implication find considerable improvements on the performance of both the conditional CAPM and CCAPM when compared to their unconditional counterparts.
Stock return predictability: Is it there?
, 2001
"... We ask whether stock returns in France, Germany, Japan ... by three instruments: the dividend yield, the earnings yield and the short rate. The predictability regression is suggested by a present value model with earnings growth, payout ratios and the short rate as state variables. We find the short ..."
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Cited by 64 (2 self)
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We ask whether stock returns in France, Germany, Japan ... by three instruments: the dividend yield, the earnings yield and the short rate. The predictability regression is suggested by a present value model with earnings growth, payout ratios and the short rate as state variables. We find the short rate to be the only robust shortrun predictor of excess returns, and find little evidence of excess return predictability by earnings or dividend yields across all countries. There is no evidence of longhorizon return predictability once we account for finite sample influence. Crosscountry predictability is stronger than predictability using local instruments. Finally, dividend and earnings yields predict future cashflow growth