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 ...
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 ...
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.
Report
A contingent claim approach to performance evaluation
We show that valuing performance is equivalent to valuing a particular contingent claim on an index portfolio. In general the form of the contingent claim is not known and must be estimated. We suggest approximating the contingent claim by a series of options. We illustrate the use of our method by evaluating the performance of 130 mutual funds during the period 1968?82. We find that the relative performance rank of a fund is rather insensitive to the choice of the index, even though the actual value of the services of the portfolio manager depends on the choice of the index.
Report
On the relation between the expected value and the volatility of the nominal excess return on stocks
We find support for a negative relation between conditional expected monthly return and conditional variance of monthly return, using a GARCH-M model modified by allowing (i) seasonal patterns in volatility, (ii) positive and negative innovations to returns having different impacts on conditional volatility, and (iii) nominal interest rates to predict conditional variance. Using the modified GARCH-M model, we also show that monthly conditional volatility may not be as persistent as was thought. Positive unanticipated returns appear to result in a downward revision of the conditional ...
Report
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 some 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, one-for-one ...
Report
Assessing specification errors in stochastic discount factor models
In this paper we develop alternative ways to compare asset pricing models when it is understood that their implied stochastic discount factors do not price all portfolios correctly. Unlike comparisons based on chi-squared statistics associated with null hypotheses that models are correct, our measures of model performance do not reward variability of discount factor proxies. One of our measures is designed to exploit fully the implications of arbitrage-free pricing of derivative claims. We demonstrate empirically the usefulness of methods in assessing some alternative stochastic factor models ...
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, ...
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.
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.