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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 50 (10 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 45 (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.
Predicting Stock Market Volatility A New Measure
 Journal of Futures Markets
, 1995
"... INTRODUCTION The CBOE Market Volatility Index (VIX) is an average of S&P 100 option (OEX) implied volatilities. As such, it represents a market consensus estimate of future stock market volatility. 1 The computation and dissemination of VIX on a realtime basis offers practitioners and academi ..."
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Cited by 44 (1 self)
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INTRODUCTION The CBOE Market Volatility Index (VIX) is an average of S&P 100 option (OEX) implied volatilities. As such, it represents a market consensus estimate of future stock market volatility. 1 The computation and dissemination of VIX on a realtime basis offers practitioners and academics an important new source of information. Practitioners, for This research was supported by the Futures and Options Research Center at the Fuqua School of Business, Duke University. We gratefully acknowledge the helpful comments and suggestions of Fischer Black, Mark Rubinstein, and two anonymous referees. We also thank participants at the University of Pennsylvania, the University of Texas at Dallas, and the University of Waterloo/KPMG Peat Marwick Thorne seminars, as well as attendees of the 1993 Conference on Financial Innovation: 20 Years of Black/Scholes and Merton (Duke University) and the 1994 Berkeley Program in Finance, Ojai Valley, California. Since OEX options are the mos
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 44 (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
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, an ..."
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Cited by 42 (9 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
Mutual Fund Performance and Seemingly Unrelated Assets
 Journal of Financial Economics
, 2001
"... Estimates of standard performance measures can be improved by using returns on assets not used to dene those measures. Alpha, the intercept in a regression of a fund's return on passive benchmark returns, can be estimated more precisely by using information in returns on nonbenchmark passive assets ..."
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Cited by 38 (10 self)
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Estimates of standard performance measures can be improved by using returns on assets not used to dene those measures. Alpha, the intercept in a regression of a fund's return on passive benchmark returns, can be estimated more precisely by using information in returns on nonbenchmark passive assets, whether or not one believes those assets are priced by the benchmarks. A fund's Sharpe ratio can be estimated more precisely by using returns on other assets as well as the fund. New estimates of these performance measures for a large universe of equity mutual funds exhibit substantial differences from the usual estimates.
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 37 (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
Tests of asset pricing models with changing expectations and an unobservable market portfolio, Unpublished working paper no
, 1984
"... When the assumption of constant risk premiums is relaxed, financial valuation models may be tested, and risk measures estimated without specifying a market index or state variables. This is accomplished by examining the behavior of conditional expected returns. The approach is developed using a sing ..."
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Cited by 36 (6 self)
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When the assumption of constant risk premiums is relaxed, financial valuation models may be tested, and risk measures estimated without specifying a market index or state variables. This is accomplished by examining the behavior of conditional expected returns. The approach is developed using a single risk premium asset pricing model as an example and then extended to models with multiple risk premiums. The methodology is illustrated using daily return data on the common stocks of the Dow Jones 30. The tests indicate that these returns are consistent with a single, timevarying risk premium. 1.
The empirical riskreturn relation: a factor analysis approach
, 2007
"... Existing empirical literature on the riskreturn relation uses a relatively small amount of conditioning information to model the conditional mean and conditional volatility of excess stock market returns. We use dynamic factor analysis for large datasets to summarize a large amount of economic info ..."
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Cited by 36 (6 self)
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Existing empirical literature on the riskreturn relation uses a relatively small amount of conditioning information to model the conditional mean and conditional volatility of excess stock market returns. We use dynamic factor analysis for large datasets to summarize a large amount of economic information by few estimated factors, and find that three new factors termed “volatility,” “risk premium,” and “real” factors contain important information about onequarterahead excess returns and volatility not contained in commonly used predictor variables. Our specifications predict 1620 % of the onequarterahead variation in excess stock market returns, and exhibit stable and statistically significant outofsample forecasting power. We also find a positive conditional riskreturn correlation.