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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 70 (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.
How big is the premium for currency risk
 Journal of Financial Economics
, 1998
"... We estimate and test the conditional version of an International Capital Asset Pricing Model using a parsimonious multivariate GARCH process. Since our approach is fully parametric, we can recover any quantity that is a function of the first two conditional moments. Our findings strongly support a m ..."
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Cited by 63 (2 self)
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We estimate and test the conditional version of an International Capital Asset Pricing Model using a parsimonious multivariate GARCH process. Since our approach is fully parametric, we can recover any quantity that is a function of the first two conditional moments. Our findings strongly support a model which includes both market and foreign exchange risk. However, both sources of risk are only detected when their prices are allowed to change over time. The evidence also indicates that, with the exception of the U.S. equity market, the premium for bearing currency risk often represents a significant
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 52 (11 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
Dissecting anomalies
 The Journal of Finance
, 2008
"... The anomalous returns associated with net stock issues, accruals, and momentum are pervasive; they show up in all size groups (micro, small, and big) in crosssection regressions, and they are also strong in sorts, at least in the extremes. The asset growth and profitability anomalies are less robus ..."
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Cited by 48 (0 self)
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The anomalous returns associated with net stock issues, accruals, and momentum are pervasive; they show up in all size groups (micro, small, and big) in crosssection regressions, and they are also strong in sorts, at least in the extremes. The asset growth and profitability anomalies are less robust. There is an asset growth anomaly in average returns on microcaps and small stocks, but it is absent for big stocks. Among profitable firms, higher profitability tends to be associated with abnormally high returns, but there is little evidence that unprofitable firms have unusually low returns.
Consumption, dividends, and the crosssection of equity returns
, 2002
"... A central economic idea is that an asset’s risk premium is determined by its ability to insure against fluctuations in consumption (i.e., by the consumption beta). Crosssectional differences in consumption betas mirror differences in the exposure of the asset’s dividends to aggregate consumption, a ..."
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Cited by 46 (11 self)
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A central economic idea is that an asset’s risk premium is determined by its ability to insure against fluctuations in consumption (i.e., by the consumption beta). Crosssectional differences in consumption betas mirror differences in the exposure of the asset’s dividends to aggregate consumption, an implication of many general equilibrium models. Hence, crosssectional differences in the exposure of dividends to consumption may provide valuable information regarding the crosssectional dispersion in risk premia. We measure the exposure of dividends to consumption (labeled as consumption leverage) by the covariance of expost dividend growth rates with the expected consumption growth rate, and alternatively by relying on stochastic cointegration between dividends and consumption. Crosssectional differences in this consumption leverage parameter can explain about 50 % of the variation in risk premia across 30 portfolios— which include 10 momentum, 10 size, and 10 booktomarket sorted portfolios. The consumption leverage model can justify much of the observed value, momentum, and size risk premium spreads. For this asset menu, alternative models proposed in the literature
An Asset Allocation Puzzle
 National Bureau of Economic Research (Cambridge, MA) Working Paper
, 1994
"... This paper examines popular advice on portfolio allocation among cash, bonds, and stocks. It documents that this advice is inconsistent with the mutualfund separation theorem, which states that all investors should hold the same composition of risky assets. In contrast to the theorem, popular advis ..."
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Cited by 46 (0 self)
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This paper examines popular advice on portfolio allocation among cash, bonds, and stocks. It documents that this advice is inconsistent with the mutualfund separation theorem, which states that all investors should hold the same composition of risky assets. In contrast to the theorem, popular advisors recommend that aggressive investors hold a lower ratio of bonds to stocks than conservative investors. The paper explores various possible explanations of this puzzle and finds them unsatisfactory. (JEL GI l) How should an investor's attitude toward risk influence the composition of his portfolio? A simple and elegant answer to this question comes from the mutualfund separation theorem. This theorem, a building block of the most basic Capital Asset Pricing Model (CAPM), is taught regularly to undergraduates and business students. According to the theorem, more riskaverse investors should hold more of their portfolios in the riskless asset. The composition of risky assets, however, should be the same for all investors. Popular financial advisors appear not to follow the mutualfund separation theorem. When these advisors are asked to allocate portfolios among stocks, bonds, and cash, they recommend more complicated strategies than indicated by the theorem. Moreover, these strategies differ from the theorem in a systematic way. According to these advisors, more riskaverse investors should hold a higher ratio of bonds to stocks. This advice contradicts the conclusion that all investors should hold risky assets in the same proportion. The purpose of this paper is to document this popular advice on portfolio allocation and
Arbitrage, and Equilibrium Asset Pricing
 Journal of Finance. 2001
"... This paper offers a model in which asset prices ref lect both covariance risk and misperceptions of firms ’ prospects, and in which arbitrageurs trade against mispricing. In equilibrium, expected returns are linearly related to both risk and mispricing measures ~e.g., fundamental0price ratios!. Wi ..."
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Cited by 45 (11 self)
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This paper offers a model in which asset prices ref lect both covariance risk and misperceptions of firms ’ prospects, and in which arbitrageurs trade against mispricing. In equilibrium, expected returns are linearly related to both risk and mispricing measures ~e.g., fundamental0price ratios!. With many securities, mispricing of idiosyncratic value components diminishes but systematic mispricing does not. The theory offers untested empirical implications about volume, volatility, fundamental0price ratios, and mean returns, and is consistent with several empirical findings. These include the ability of fundamental0price ratios and market value to forecast returns, and the domination of beta by these variables in some studies. THE CLASSIC THEORY OF SECURITIES MARKET equilibrium beginning with Sharpe ~1964!, Lintner ~1965!, and Black ~1972! is based on the interaction of fully rational optimizing investors. In recent years, several important studies have explored alternatives to the premise of full rationality. One
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 41 (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
Neural differentiation of expected reward and risk in human subcortical structures, Neuron 51
, 2006
"... In decisionmaking under uncertainty, economic studies emphasize the importance of risk in addition to expected reward. Studies in neuroscience focus on expected reward and learning rather than risk. We combined functional imaging with a simple gambling task to vary expected reward and risk simultan ..."
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Cited by 40 (3 self)
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In decisionmaking under uncertainty, economic studies emphasize the importance of risk in addition to expected reward. Studies in neuroscience focus on expected reward and learning rather than risk. We combined functional imaging with a simple gambling task to vary expected reward and risk simultaneously and in an uncorrelated manner. Drawing on financial decision theory, we modeled expected reward as mathematical expectation of reward, and risk as reward variance. Activations in dopaminoceptive structures correlated with both mathematical parameters. These activations differentiated spatially and temporally. Temporally, the activation related to expected reward was immediate, while the activation related to risk was delayed. Analyses confirmed that our paradigm minimized confounds from learning, motivation, and salience. These results suggest that the primary task of the dopaminergic system is to convey signals of upcoming stochastic rewards, such as expected reward and risk, beyond its role in learning, motivation, and salience.