Search Results
Report
The CAPM is alive and well
In empirical studies of the CAPM, it is commonly assumed that, (a) the return to the value-weighted portfolio of all stocks is a reasonable proxy for the return on the market portfolio of all assets in the economy, and (b) betas of assets remain constant over time. Under these assumptions, Fama and French (1992) find that the relation between average return and beta is flat. We argue that these two auxiliary assumptions are not reasonable. We demonstrate that when these assumptions are relaxed, the empirical support for the CAPM is very strong. When human capital is also included in measuring ...
Discussion Paper
Ex-day behavior of Japanese stock prices: new insights from new methodology
We study the ex-dividend day behavior of Japanese stock prices for the period 198387. We find that, contrary to previous findings, prices of ex-day stocks drop by nearly the full amount of the dividend. However, ex-day stocks shows an abnormal return. Also, for the many ex-dividend day stocks that also go ex-rights on the same ex-day, we find that the return is on average higher than that for stocks without rights issues. We thus conclude that the ex-day behavior of Japanese stocks are qualitatively similar to that of U.S. stocks.
Report
Why do stock prices drop by less than the value of the dividend? Evidence from a country without taxes
It is well documented that on average, stock prices drop by less than the value of the dividend on ex-dividend days. This has commonly been attributed to the effect of tax clienteles. We use data from the Hong Kong stock market where neither dividends nor capital gains are taxed. As in the U.S.A. the average stock price drop is less than the value of the dividend; specifically, in Hong Kong the average dividend was HK $0.12 and the average price drop was HK $0.06. We are able to account for this both theoretically and empirically through market microstructure based arguments.
Working Paper
Ex-dividend price behavior of common stocks
This study examines common stock prices around ex-dividend dates. Such price data usually contain a mixture of observations - some with and some without arbitrageurs and/or dividend capturers active. Our theory predicts that such mixing will result in a nonlinear relation between percentage price drop and dividend yield - not the commonly assumed linear relation. This prediction and another important prediction of theory are supported empirically. In a variety of tests, marginal price drop is not significantly different from the dividend amount. Thus, over the last several decades, ...
Journal Article
The CAPM debate
This article describes the academic debate about the usefulness of the capital asset pricing model (the CAPM) developed by Sharpe and Lintner. First the article describes the data the model is meant to explain?the historical average returns for various types of assets over long time periods. Then the article develops a version of the CAPM and describes how it measures the risk of investing in particular assets. Finally the article describes the results of competing studies of the model's validity. Included are studies that support the CAPM (Black; Black, Jensen, and Scholes; Fama and ...
Discussion Paper
Implications of security market data for models of dynamic economies
We show how to use security market data to restrict the admissible region for means and standard deviations of intertemporal marginal rates of substitution (IMRSs) of consumers. Our approach is (i) nonparametric and applies to a rich class of models of dynamic economies; (ii) characterizes the duality between the mean-standard deviation frontier for IMRSs and the familiar mean-standard deviation frontier for asset returns; and (iii) exploits the restriction that IMRSs are positive random variables. The region provides a convenient summary of the sense in which asset market data are anomalous ...
Report
Seasonalities in security returns: the case of earnings announcements
An examination of the behavior of stock returns around quarterly earnings announcement dates finds a seasonal pattern: small firms show large positive abnormal returns and a sizable increase in the variability of returns around these dates. Only part of the large abnormal returns can be accounted for by the fact that firms with good news tend to announce early. Large firms show no abnormal returns around announcement dates and a much smaller increase in variability.
Report
Econometric evaluation of asset pricing models
We provide a brief review of the techniques that are based on the Generalized Method of Moments (GMM) and used for evaluating capital asset pricing models. We first develop the CAPM and multi-beta models and discuss the classical two-stage regression method originally used to evaluate them. We then describe the pricing kernel representation of a generic asset pricing model; this representation facilitates use of the GMM in a natural way for evaluating the conditional and unconditional versions of most asset pricing models. We also discuss diagnostic methods that provide additional insights.
Journal Article
The simple analytics of commodity futures markets: do they stabilize prices? Do they raise welfare?
This paper uses a simple, graphical approach to analyze what happens to commodity prices and economic welfare when futures markets are introduced into an economy. It concludes that these markets do not necessarily make prices more or less stable. It also concludes that, contrary to common belief, whatever happens to commodity prices is not necessarily related to what happens to the economic welfare of market participants: even when futures markets reduce the volatility of prices, some people can be made worse off. These conclusions come from a series of models that differ in their assumptions ...
Discussion Paper
Relationship between labor-income risk and average return: empirical evidence from the Japanese stock market
In Japan, as in the United States, stocks that are more sensitive to changes in the monthly growth rate of labor income earn a higher return on average. Whereas the stock-index beta can only explain 2 percent of the cross-sectional variation in the average return on stock portfolios, the stock-index beta and the labor-beta together explain 75 percent of the variation. We find that the labor-beta drives out the size effect but not the book-to-market-price effect that is documented in the literature. We explore the extent to which these results are an artifact of seasonal patterns in ...