BUBBLES AND MULTIPLE-FACTOR ASSET PRICING MODELS

2016 ◽  
Vol 19 (01) ◽  
pp. 1650007 ◽  
Author(s):  
ROBERT JARROW
Keyword(s):  
Asset Pricing ◽  
Free Market ◽  
Asset Price ◽  
Pricing Models ◽  
Risk Premiums ◽  
Asset Price Bubbles ◽  
Price Bubbles ◽  
Asset Pricing Models ◽  
Empirical Implications ◽  
Multiple Factor

This paper derives a multiple-factor asset pricing model with asset price bubbles in an arbitrage-free, competitive, and frictionless market. As such it generalizes existing asset pricing models, all of which implicitly assume asset price bubbles do not exist. This generalization leads to two new empirical implications. The first is that positive alphas can exist in an arbitrage-free market due to the existence of asset price bubbles. These positive alphas do not represent abnormal profit opportunities. The second is that bubble risk factors can exist with positive risk premiums. The testing of these new empirical implications awaits subsequent research.

scholarly journals An Experimental Test of the Lucas Asset Pricing Model

2018 ◽  
Vol 86 (2) ◽  
pp. 627-667 ◽  
Author(s):  
Sean Crockett ◽  
John Duffy ◽  
Yehuda Izhakian
Keyword(s):  
Asset Pricing ◽  
Asset Price ◽  
Consumption Smoothing ◽  
Asset Price Bubbles ◽  
Price Bubbles ◽  
Fundamental Value ◽  
Experimental Treatments ◽  
Marginal Returns ◽  
Dynamic Asset Pricing ◽  
Fundamental Price

Abstract We implement a dynamic asset pricing experiment in the spirit of Lucas (1978) with storable assets and non-storable cash. In the first treatment, we impose diminishing marginal returns to cash to incentivize consumption smoothing across periods. We find that subjects use the asset to smooth consumption, although the asset trades at a discount relative to the risk-neutral fundamental price. This under-pricing is a departure from the asset price “bubbles” observed in the large experimental asset pricing literature originating with Smith et al. (1988) and can be rationalized by considering subjects’ risk aversion with respect to uncertain money earnings. In a second treatment, with no induced motivation for trade à la the Smith et al. design, we find that the asset trades at a premium relative to its expected value and that shareholdings are highly concentrated. Elimination of asset price uncertainty in additional experimental treatments serves to reinforce the same observations, and suggests that speculative behaviour explains the departure of prices from fundamental value in the absence of a consumption-smoothing motive for asset trades.

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.

scholarly journals Profitability in Asset Pricing Models for Chinese Equities 1996-2016

2018 ◽  
Vol 4 (2) ◽  
pp. 118
Author(s):  
Dong Liu
Keyword(s):  
Asset Pricing ◽  
Factor Model ◽  
Economic Value ◽  
Equity Returns ◽  
Chinese Market ◽  
Pricing Models ◽  
Size Premium ◽  
Asset Pricing Models ◽  
Operating Leverage ◽  
Multiple Factor

<p><em>I follow Novy Marx (2011, 2013) to investigate and compare firms’ gross profit, operating leverage as predictors of returns for a cross-section of traded Chinese equities spanning from1996-2016. I use portfolio tests and Fama-MacBeth regressions, find that gross-profit-to-market-capitalization ratios significantly predict returns on sampled stocks. I also find that sorting portfolios by gross profitability and size outperforms in the Chinese market. Hence, I create a Market-Profitability-Size model that captures profitability and size premium among returns of sampled stocks. Based on Gibbons-Ross-Shanken test and economic value, I demonstrate that my enhanced model outperforms Fama-French multiple-factor model in isolating influences on equity returns.</em></p>

scholarly journals International Real Estate Review

2008 ◽  
Vol 11 (2) ◽  
pp. 32-46
Author(s):  
John Okunev ◽  
◽  
Patrick J. Wilson ◽  
Keyword(s):  
Asset Pricing ◽  
Real Estate ◽  
Risk Premium ◽  
Time Variation ◽  
Trading Strategies ◽  
Real Estate Investment Trust ◽  
Pricing Models ◽  
Real Estate Investment ◽  
Risk Premiums ◽  
Asset Pricing Models

This study presents further evidence of the predictability of excess equity REIT (real estate investment trust) returns . Recent evidence on forecasting excess returns using fundamental variables has resulted in diminishing returns from the 1990’s onward. Trading strategies based on these forecasts have not significantly outperformed the buy/hold strategy of the 1990’s. We have developed an alternative strategy that is based on the time variation of the risk premium of investors. Our results indicate that it is possible to outperform the buy/hold strategy by modeling the time variation of the risk premium. By modeling the dynamic behavior of the risk premium, we are able to implicitly capture economic risk premiums that are not captured by conventional multi beta asset pricing models.

Risk measures and the impact of asset price bubbles

2015 ◽  
Vol 17 (3) ◽  
pp. 35-56 ◽  
Author(s):  
Robert Jarrow ◽  
Felipe Bastos G. Silva
Keyword(s):  
Risk Measures ◽  
Asset Price ◽  
Asset Price Bubbles ◽  
Price Bubbles ◽  
The Impact
Sign in / Sign up

Export Citation Format

Share Document