scholarly journals Consumption-Based Asset Pricing When Consumers Make Mistakes

2021 ◽  
Vol 2021 (015) ◽  
pp. 1-71
Author(s):  
Chris Anderson ◽  
Keyword(s):  
Asset Pricing ◽  
Stock Returns ◽  
Equity Premium ◽  
Expected Returns ◽  
Power Utility ◽  
Expected Return ◽  
Risk Return ◽  
Asset Pricing Models ◽  
Long Run ◽  
Wide Range

I analyze the implications of allowing consumers to make mistakes on the risk-return relationships predicted by consumption-based asset pricing models. I allow for consumption mistakes using a model in which a portfolio manager selects investments on a consumer's behalf. The consumer has an arbitrary consumption policy that could reflect a wide range of mistakes. For power utility, expected returns do not generally depend on exposure to single-period consumption shocks, but robustly depend on exposure to both long-run consumption and expected return shocks. I empirically show that separately accounting for both types of shocks helps explain the equity premium and cross section of stock returns.

Term Structure of Risk in Expected Returns

2021 ◽  
Author(s):  
Irina Zviadadze
Keyword(s):  
Asset Pricing ◽  
Term Structure ◽  
Expected Returns ◽  
Pricing Models ◽  
Structural Shocks ◽  
Risk Return ◽  
Asset Pricing Models ◽  
Long Run ◽  
Multiple Shocks ◽  
Long Run Risk

Abstract This paper develops a methodology to test structural asset pricing models based on their implications for the multiperiod risk-return trade-off. A new measure, the term structure of risk, captures the sensitivities of multiperiod expected returns to structural shocks. The level and slope of the term structure of risk can indicate misspecification in equilibrium models. I evaluate the performance of asset pricing models with long-run risk, consumption disasters, and variance shocks. I find that only a model with multiple shocks in the variance of consumption growth is consistent with the propagation of and compensation for risk in the aggregate stock market.

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 Optimisation of Time-Varying Asset Pricing Models with Penetration of Value at Risk and Expected Shortfall

Mathematics ◽  
2021 ◽  
Vol 9 (4) ◽  
pp. 394
Author(s):  
Adeel Nasir ◽  
Kanwal Iqbal Khan ◽  
Mário Nuno Mata ◽  
Pedro Neves Mata ◽  
Jéssica Nunes Martins
Keyword(s):  
At Risk ◽  
Asset Pricing ◽  
Stock Returns ◽  
Value At Risk ◽  
Expected Shortfall ◽  
Time Varying ◽  
Pricing Models ◽  
Asset Pricing Model ◽  
Asset Pricing Models ◽  
Market Beta

This study aims to apply value at risk (VaR) and expected shortfall (ES) as time-varying systematic and idiosyncratic risk factors to address the downside risk anomaly of various asset pricing models currently existing in the Pakistan stock exchange. The study analyses the significance of high minus low VaR and ES portfolios as a systematic risk factor in one factor, three-factor, and five-factor asset pricing model. Furthermore, the study introduced the six-factor model, deploying VaR and ES as the idiosyncratic risk factor. The theoretical and empirical alteration of traditional asset pricing models is the study’s contributions. This study reported a strong positive relationship of traditional market beta, value at risk, and expected shortfall. Market beta pertains its superiority in estimating the time-varying stock returns. Furthermore, value at risk and expected shortfall strengthen the effects of traditional beta impact on stock returns, signifying the proposed six-factor asset pricing model. Investment and profitability factors are redundant in conventional asset pricing models.

scholarly journals ANALISIS PORTOFOLIO SEBAGAI DASAR PENGAMBILAN KEPUTUSAN INVESTASI SAHAM YANG TERDAFTAR DI BEI

IQTISHODUNA ◽  
2013 ◽  
Author(s):  
Sri Yati
Keyword(s):  
Stock Market ◽  
Stock Returns ◽  
Analytical Method ◽  
Stock Exchange ◽  
Investment Decisions ◽  
Portfolio Analysis ◽  
Rate Of Return ◽  
Expected Returns ◽  
Risk Level ◽  
Expected Return

This study aims to analyze rate of return and risk as the tools to form the portfolio analysis on 15 the most actives stocks listed in Indonesian Stock Exchange. Descriptive analytical method is used to describe the correlation between three variables: stock returns, expected returns of stock market, and beta in order to measure the risk of stocks to help the investors in making the investment decisions. The research materials are 15 the most actives stocks listed in Indonesian Stock Exchange during 2008-2009. The results show that PT. Astra International Tbk. has the highest average expected return of individual stock (Ri) of 308,3355685, while PT. Perusahaan Gas Negara Tbk. has the lowest of -477,0827847. The average expected return of stock market (Rm) is 0,00247163. PT. Astra International Tbk. has the highest systematic risk level of 20229,14205, while the lowest of -147,5793279 is PT. Kalbe Farma Tbk. Furthermore, the results also indicate that there are 9 stocks can be combined to form optimal portfolio because they have positive expected returns.

scholarly journals Size, Value and Momentum in Pakistan Equity Market: Size and Liquidity Exposures

2018 ◽  
Vol III (I) ◽  
pp. 376-394 ◽  
Author(s):  
Romana Bangash ◽  
Faisal Khan ◽  
Zohra Jabeen
Keyword(s):  
Asset Pricing ◽  
Stock Returns ◽  
Stock Exchange ◽  
Equity Market ◽  
Future Research ◽  
Momentum Strategy ◽  
Monthly Data ◽  
Average Value ◽  
Asset Pricing Models ◽  
Fama And French

The study inspects the size and liquidity pattern in Pakistan equity market. Sample size contains 278 non-financial firm's monthly data listed on Pakistan Stock Exchange (PSX) from 2001 to 2012. This study uses three asset pricing models (eq.5), (eq.6) and (eq.7). Four factors asset pricing model estimates that momentum factor is positively and negatively linked with winner and loser stocks, both in size and liquidity patterns. Although it is observed that the presence of size and liquidity does not affect the coefficient results but average value of momentum premium in larger in liquidity than size pattern. Further, the study reveals high average stock returns on momentum strategy in liquidity pattern than size that is 8.05% Vs 6.67%, respectively. Results of this study contradicts Fama and French (2012) who concluded that size pattern in momentum factor outperform the equity market. But this study conclude that liquidity pattern outperforms the size pattern in momentum factor. This study raises the question that should investors and academicians consider size or liquidity pattern in momentum factor for high returns and future research?

Long-term prior return patterns in stock and sector returns in India

2014 ◽  
Vol 11 (2) ◽  
pp. 192-210
Author(s):  
Sanjay Sehgal ◽  
Sakshi Jain
Keyword(s):  
Asset Pricing ◽  
Stock Returns ◽  
Risk Model ◽  
Factor Model ◽  
Size Factor ◽  
Content Type ◽  
Long Run ◽  
Portfolio Managers ◽  
Sector Returns

Purpose – The purpose of this paper is to analyze long-term prior return patterns in stock returns for India. Design/methodology/approach – The methodology involves portfolio generation based on company characteristics and long-term prior return (24-60 months). The characteristic sorted portfolios are then regressed on risk factors using one factor (capital asset pricing model (CAPM)) and multi-factor model (Fama-French (FF) model and four factor model involving three FF factors and an additional sectoral momentum factor). Findings – After controlling for short-term momentum (up to 12 months) as documented by Sehgal and Jain (2011), the authors observe that weak reversals emerge for the sample stocks. The risk model CAPM fails to account for these long-run prior return patterns. FF three-factor model is able to explain long-term prior return patterns in stock returns with the exception of 36-12-12 strategy. The value factor plays an important role while the size factor does not explain cross-section of average returns. Momentum patterns exist in long-term sector returns, which are stronger for long-term portfolio formation periods. Further, the authors construct sector factor and observe that prior returns patterns in stock returns are partially absorbed by this factor. Research limitations/implications – The findings are relevant for investment analysts and portfolio managers who are continuously tracking global markets, including India, in pursuit of extra normal returns. Originality/value – The study contributes to the asset pricing and behavioral literature from emerging markets.

scholarly journals An Empirical Modelling of New Zealand Hospitality and Tourism Stock Returns

2013 ◽  
Vol 2013 ◽  
pp. 1-10 ◽  
Author(s):  
Christine Lim ◽  
Felix Chan
Keyword(s):  
New Zealand ◽  
Stock Returns ◽  
Money Supply ◽  
Discount Rate ◽  
Expected Returns ◽  
Tourism Demand ◽  
Expected Return ◽  
Risk Premiums ◽  
Term Premium ◽  
Unit Increase

This paper examines the factor risk premiums of stock returns for the hospitality and tourism companies in New Zealand. The Arbitrage Pricing Theory (APT) approach is used to investigate the expected return for stock portfolio with respect to market, macro (i.e., money supply and discount rate), and tourism factor sensitivities. Monthly stock prices, market index, tourism, and macroeconomic data are used in the study. The results indicate that the risk premiums for international tourism demand and term premium (proxy for discount rate) are positively significant at the 5% level. A one unit increase in tourist arrival sensitivity would result in expected return increase of 10 to 17 percentage point. Similarly, a one unit increase in term premium can increase hospitality-tourism expected returns by 0.2 percentage point. However, the findings for the money supply factor are not significant. As the study shows that investors face high positive tourism demand risk, it is imperative for firms and policymakers in New Zealand to promote inbound tourism through effective marketing and management. This in turn can provide high expected returns and create shareholder value for investors.

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