scholarly journals Creative Destruction and Asset Prices

2016 ◽  
Vol 51 (6) ◽  
pp. 1739-1768 ◽  
Author(s):  
Joachim Grammig ◽  
Stephan Jank
Keyword(s):  
Asset Pricing ◽  
Factor Model ◽  
Creative Destruction ◽  
Expected Returns ◽  
Expected Return ◽  
Cross Sectional ◽  
Large Growth ◽  
Estimated Risk ◽  
Growth Stocks ◽  
Invention Activity

We relate Schumpeter’s notion of creative destruction to asset pricing, thereby offering a novel explanation of size and value premia. We argue that small-value firms must offer higher expected returns to compensate for the risk posed by serendipitous invention activity, whereas large-growth stocks provide protection against creative destruction and receive expected return discounts. A 2-factor model that accounts for creative-destruction risk effectively explains the cross-sectional return variation of size- and book-to-market-sorted portfolios. The estimated risk compensations associated with creative destruction are substantial and statistically significant, indicating their relevance for asset pricing.

Cross-Section of Expected Returns Based on Equity Duration

2019 ◽  
Vol 27 (3) ◽  
pp. 297-327
Author(s):  
Sungjeh Moon ◽  
Joonhyuk Song
Keyword(s):  
Cross Section ◽  
Risk Premium ◽  
Factor Model ◽  
Explanatory Power ◽  
Significant Risk ◽  
Significant Risk Factor ◽  
Expected Returns ◽  
Expected Return ◽  
Cross Sectional ◽  
Risk Premiums

We analyze the cross-sectional expected return of KOSPI stocks using equity duration. From 1991 to 2018, we calculate equity durations for the KOSPI listed stocks (including de-listed stocks) and find that the shorter the equity duration, the higher the risk premium. Using the 4-factor model with equity duration added to the benchmark 3-factor model, the explanatory power of the 4-factor model is superior to that of the existing benchmark model in accounting for risk premiums. This is an unusual finding that is not readily explainable by the traditional CAPM or the Fama-French 3-factor model. This can be interpreted that the equity duration is a separate and significant risk factor dissociated from the HML of the 3-factor model.

scholarly journals Uji Empiris Pengaruh Idiosyncratic Volatility Terhadap Expected Return: Aplikasi Fama-French Five Factor Model

2019 ◽  
Vol 9 (2) ◽  
pp. 268
Author(s):  
Muhammad Pudjianto ◽  
Buddi Wibowo
Keyword(s):  
Asset Pricing ◽  
Factor Model ◽  
Direct Method ◽  
Five Factor Model ◽  
Idiosyncratic Volatility ◽  
Expected Return ◽  
Cross Sectional ◽  
Ex Ante

Penelitian ini bertujuan untuk melakukan pengujian pengaruh antara idiosyncratic volatility dengan expected return. Idiosyncratic volatility dihitung dengan pendekatan langsung (direct method), yaitu standar deviasi dari residual yang dihasilkan model asset pricing Fama-French Five Factor. Penelitian ini menguji idiosyncratic volatility secara contemporaneous dan ex-ante. One-month lagged idiosyncratic volatility digunakan sebagai proksi dari expected idiosyncratic volatility. Metode yang digunakan dalam menguji model penelitian adalah Fama-Macbeth Cross-Sectional Regression. Hasil penelitian menunjukkan bahwa terdapat pengaruh yang positif dan signifikan antara realized idiosyncratic volatility dengan expected return pada waktu yang bersamaan (contemporaneous). Sedangkan secara ex-ante terdapat pengaruh yang negatif dan signifikan antara one-month lagged idiosyncratic volatility dengan expected return.

The Cross Section of Expected Returns and Amortized Spreads

2006 ◽  
Vol 09 (04) ◽  
pp. 597-638 ◽  
Author(s):  
Zhongzhi Lawrence He ◽  
Lawrence Kryzanowski
Keyword(s):  
Asset Pricing ◽  
Risk Premium ◽  
Overlapping Generations ◽  
Expected Returns ◽  
Relative Importance ◽  
Expected Return ◽  
Cross Sectional ◽  
Market Risk Premium ◽  
The Cross ◽  
Level Effect

The cross-sectional relationship between expected returns and amortized spreads is studied in an overlapping-generations economy with an average investor. The commonality in liquidity is directly incorporated into the asset-pricing relation. In a static equilibrium, the amortized spread of an asset is related to its expected return through four channels; namely: the equilibrium zero-beta rate, the market risk premium, a level effect, and an incremental sensitivity effect. Although both are present over the entire period, their relative importance shifts from a significant level to a significant sensitivity effect from the earlier to most recent sub-period in the Canadian stock market.

The Bias in Two-Pass Regression Tests of Asset-Pricing Models in Presence of Idiosyncratic Errors with Cross-Sectional Dependence

2019 ◽  
Vol 22 (02) ◽  
pp. 1950012
Author(s):  
Thomas Gramespacher ◽  
Armin Bänziger
Keyword(s):  
Asset Pricing ◽  
Risk Premium ◽  
Measurement Errors ◽  
Factor Model ◽  
Pricing Models ◽  
Time Series Regression ◽  
Cross Sectional ◽  
Asset Pricing Models ◽  
Slope Estimator ◽  
Regression Tests

In two-pass regression-tests of asset-pricing models, cross-sectional correlations in the errors of the first-pass time-series regression lead to correlated measurement errors in the betas used as explanatory variables in the second-pass cross-sectional regression. The slope estimator of the second-pass regression is an estimate for the factor risk-premium and its significance is decisive for the validity of the pricing model. While it is well known that the slope estimator is downward biased in presence of uncorrelated measurement errors, we show in this paper that the correlations seen in empirical return data substantially suppress this bias. For the case of a single-factor model, we calculate the bias of the OLS slope estimator in the presence of correlated measurement errors with a first-order Taylor-approximation in the size of the errors. We show that the bias increases with the size of the errors, but decreases the more the errors are correlated. We illustrate and validate our result using a simulation approach based on empirical data commonly used in asset-pricing tests.

Linear Beta Pricing with Inefficient Benchmarks

2013 ◽  
Vol 03 (01) ◽  
pp. 1350004 ◽  
Author(s):  
George Diacogiannis ◽  
David Feldman
Keyword(s):  
Asset Pricing ◽  
Market Risk ◽  
Expected Returns ◽  
Pricing Model ◽  
Pricing Models ◽  
Expected Return ◽  
Risk Premiums ◽  
Asset Pricing Models ◽  
Current Asset ◽  
Mean Variance

Current asset pricing models require mean-variance efficient benchmarks, which are generally unavailable because of partial securitization and free float restrictions. We provide a pricing model that uses inefficient benchmarks, a two-beta model, one induced by the benchmark and one adjusting for its inefficiency. While efficient benchmarks induce zero-beta portfolios of the same expected return, any inefficient benchmark induces infinitely many zero-beta portfolios at all expected returns. These make market risk premiums empirically unidentifiable and explain empirically found dead betas and negative market risk premiums. We characterize other misspecifications that arise when using inefficient benchmarks with models that require efficient ones. We provide a space geometry description and analysis of the specifications and misspecifications. We enhance Roll (1980), Roll and Ross's (1994), and Kandel and Stambaugh's (1995) results by offering a "Two Fund Theorem," and by showing the existence of strict theoretical "zero relations" everywhere inside the portfolio frontier.

Momentum Effect as Part of a Market Equilibrium

2014 ◽  
Vol 49 (1) ◽  
pp. 107-130 ◽  
Author(s):  
Seung Mo Choi ◽  
Hwagyun Kim
Keyword(s):  
Market Equilibrium ◽  
Expected Returns ◽  
Momentum Effect ◽  
Expected Return ◽  
Cross Sectional ◽  
Recursive Preferences ◽  
Momentum Profits ◽  
Multiple Assets ◽  
Positive Return

AbstractDoes the momentum effect arise naturally from the determination of asset prices in market equilibrium? We calibrate a standard endowment model of multiple assets under recursive preferences. The momentum effect partly comes from investors’ aversion to consumption risks. An unexpected dividend increase generates a positive return and increases the asset’s proportion of consumption, raising the correlation between its future dividend growth and consumption growth. This is compensated by a higher expected return, generating the momentum effect. The cross-sectional difference in expected returns is also a key contributor. The quantified model produces sizable momentum profits, often close to the observed profits.

scholarly journals MULTIFACTOR ASSET PRICING ANALYSIS OF THE BALTIC STOCK MARKET

Ekonomika ◽  
2010 ◽  
Vol 89 (4) ◽  
pp. 85-95 ◽  
Author(s):  
Raimonds Lieksnis
Keyword(s):  
Asset Pricing ◽  
Stock Market ◽  
Factor Model ◽  
Stock Market Index ◽  
Cross Sectional ◽  
Economic Significance ◽  
Market Index ◽  
Fama And French ◽  
The Baltic ◽  
Three Factor

This study investigates whether the Fama–French three-factor asset pricing model is applicable for explaining cross-sectional returns of stocks listed in the Baltic stock exchanges. Findings confirm the validity and economic significance of the three-factor model for the Baltic stock market: only investors who chose to invest in value stocks during the reference period achieved positive returns by matching or beating the returns of the stock market index. The monthly returns of 8 Latvian, 13 Estonian and 27 Lithuanian company stocks are analyzed for the time period from June 2002 till February 2010 by the methodology presented in Davis, Fama, and French (2000). Cross-sectional multivariate regression is calculated with stock portfolios representing the book-to-market and capitalization of companies as independent variables along with the stock market index. The study concludes that these three factors in the three-factor model are statistically significant, but, in line with earlier studies, regression intercepts are significantly different from zero and the model is not statistically confirmed.p>

scholarly journals Previsibilidade de Retorno das Ações na Bovespa: Um Teste Envolvendo o Modelo de Fator de Retorno Esperado

2004 ◽  
Vol 2 (2) ◽  
pp. 183
Author(s):  
Luciano Martin Rostagno ◽  
Gilberto De Oliveira Kloeckner ◽  
João Luiz Becker
Keyword(s):  
Stock Market ◽  
Stock Returns ◽  
Trading Volume ◽  
Factor Model ◽  
Explanatory Power ◽  
Return Predictability ◽  
Expected Return ◽  
Cross Sectional ◽  
Theoretical Assumptions ◽  
History Of

This paper examines the hypothesis of asst return predictability in the Brazilian Stock Market (Bovespa). Evidence suggests that seven factors explain most of the monthly differential returns of the stocks included in the sample. Within the factors that present statistically significant mean, two are liquidity factors (market capitalization and trading volume trend), three refer to price level of stocks (dividend to price, dividend to price trend, and cash flow to price), and two relate to price history of stocks (3 and 12 months excess return). Contradicting theoretical assumptions, risk factors present no explanatory power on cross-sectional returns. Using an expected return factor model, it is contended that stock returns are quite predictable. An investment simulation shows that the model is able to assemble portfolios with statistically significant higher returns. Additional tests indicate that the winner portfolios are not fundamentally riskier suggesting mispricing of assets in the Brazilian stock Market.

Can the Cross-Sectional Variation in Expected Stock Returns Explain Momentum?

2009 ◽  
Vol 44 (4) ◽  
pp. 777-794 ◽  
Author(s):  
George Bulkley ◽  
Vivekanand Nawosah
Keyword(s):  
Stock Returns ◽  
Expected Returns ◽  
Sample Period ◽  
Expected Return ◽  
Cross Sectional ◽  
Holding Period ◽  
Expected Stock Returns ◽  
The Cross

AbstractIt has been hypothesized that momentum might be rationally explained as a consequence of the cross-sectional variation of unconditional expected returns. Stocks with relatively high unconditional expected returns will on average outperform in both the portfolio formation period and in the subsequent holding period. We evaluate this explanation by first removing unconditional expected returns for each stock from raw returns and then testing for momentum in the resulting series. We measure the unconditional expected return on each stock as its mean return in the whole sample period. We find momentum effects vanish in demeaned returns.

Macroeconomic Risks and Asset Pricing: Evidence from a Dynamic Stochastic General Equilibrium Model

2019 ◽  
Vol 65 (8) ◽  
pp. 3585-3604 ◽  
Author(s):  
Erica X. N. Li ◽  
Haitao Li ◽  
Shujing Wang ◽  
Cindy Yu
Keyword(s):  
Asset Pricing ◽  
General Equilibrium ◽  
Factor Model ◽  
Dynamic Stochastic General Equilibrium ◽  
Dsge Model ◽  
Cross Sectional ◽  
Dynamic Stochastic ◽  
Monetary Policy Shock ◽  
Macroeconomic Risks

We study the relation between macroeconomic fundamentals and asset pricing through the lens of a dynamic stochastic general equilibrium (DSGE) model. We provide full-information Bayesian estimation of the DSGE model using macroeconomic variables and extract the time series of four latent fundamental shocks of the model: neutral technology shock, investment-specific technological shock, monetary policy shock, and risk shock. Asset pricing tests show that our model-implied four-factor model can explain a number of prominent cross-sectional return spreads: size, book-to-market, investment, earnings, and long-term reversal. The investment-specific technological shock and risk shock play the most important role in explaining those return spreads. This paper was accepted by Neng Wang, finance.

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