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Keywords:asset pricing OR Asset pricing OR Asset Pricing 

Journal Article
What happened to the U.S. stock market? accounting for the past 50 years

The extreme volatility of stock market values has been the subject of a large body of literature. Previous research focused on the short run because of a widespread belief that in the long run the market reverts to well-established fundamentals. The authors' research suggests this belief should be questioned. First, they show actual dividends cannot account for the secular trends of stock market values. They then consider a more comprehensive measure of capital income, which displays large secular fluctuations that roughly coincide with changes in stock market trends. Under perfect foresight, ...
Review , Volume 91 , Issue Nov , Pages 627-646

Journal Article
Liquidity, monetary policy, and financial cycles

A close look at how financial intermediaries manage their balance sheets suggests that these institutions raise their leverage during asset price booms and lower it during downturns - pro-cyclical actions that tend to exaggerate the fluctuations of the financial cycle. The authors of this study argue that the growth rate of aggregate balance sheets may be the most fitting measure of liquidity in a market-based financial system. Moreover, the authors show a strong correlation between balance sheet growth and the easing and tightening of monetary policy.
Current Issues in Economics and Finance , Volume 14 , Issue Jan

Journal Article
Remarks on the measurement, valuation, and reporting of intangible assets

This paper was presented at the conference "Economic Statistics: New Needs for the Twenty-First Century," cosponsored by the Federal Reserve Bank of New York, the Conference on Research in Income and Wealth, and the National Association for Business Economics, July 11, 2002. Intangible assets are both large and important. However, current financial statements provide very little information about these assets. Even worse, much of the information that is provided is partial, inconsistent, and confusing, leading to significant costs to companies, to investors, and to society as a whole. ...
Economic Policy Review , Issue Sep , Pages 17-22

Working Paper
Solving an Empirical Puzzle in the Capital Asset Pricing Model

A long standing puzzle in the Capital Asset Pricing Model (CAPM) has been the inability of empirical work to validate it. This paper presents a new approach to estimating the CAPM, taking into account the differences between observable and expected returns for risky assets and for the market portfolio of all traded assets, as well as inherent nonlinearities and the effects of excluded variables. Using this approach, we provide evidence that the relation between the observable returns on stock and market portfolios is nonlinear.
Finance and Economics Discussion Series , Paper 1996-14

Discussion Paper
When Do Trade Frictions Increase Liquidity?

Economists tend to assume that frictions that limit trading in financial markets reduce liquidity and lower investor welfare. In this blog I discuss a recent staff study of mine that challenges that conventional wisdom. I explain how introducing trading frictions—such as circuit breakers—that slow or halt trading in an over-the-counter market experiencing a fire sale might, paradoxically, lead to higher liquidity and investor welfare.
Liberty Street Economics , Paper 20111219

Working Paper
Information diffusion based explanations of asset pricing anomalies

In this paper we develop information based factors which outperform other popular factors used in the multifactor pricing literature such as the Fama and French size and book-to-market factors. The first factor is based on the age of an asset, measured by the number of months since the asset?s IPO, while the second factor is based on the percentage of trading days an asset does not trade in a given year. Both factors attempt to capture the quality and speed of information diffusion on the market. Our information factors perform particularly well on momentum portfolios, which, Hong et al ...
Supervisory Research and Analysis Working Papers , Paper QAU07-6

Report
The cost of capital of the financial sector

Standard factor pricing models do not capture well the common time-series or cross-sectional variation in average returns of financial stocks. We propose a five-factor asset pricing model that complements the standard Fama and French (1993) three-factor model with a financial sector ROE factor (FROE) and the spread between the financial sector and the market return (SPREAD). This five-factor model helps to alleviate the pricing anomalies for financial sector stocks and also performs well for nonfinancial sector stocks compared with the Fama and French (2014) five-factor model or the Hou, Xue, ...
Staff Reports , Paper 755

Report
Trading risk and volatility in interest rate swap spreads

This paper examines how risk in trading activity can affect the volatility of asset prices. We look for this relationship in the behavior of interest rate swap spreads and in the volume and interest rates of repurchase contracts. Specifically, we focus on convergence trading, in which speculators take positions on a bet that asset prices will converge to normal levels. We investigate how the risks in convergence trading can affect price volatility in a form of positive feedback that can amplify shocks in asset prices. In our analysis, we see empirical evidence of both stabilizing and ...
Staff Reports , Paper 178

Report
Inference, arbitrage, and asset price volatility

This paper models the impact of arbitrageurs on stock prices when arbitrageurs are uncertain about the drift of the dividend process of a risky asset. Under perfect information, the presence of risk-neutral arbitrageurs unambiguously reduces the volatility of asset returns. When arbitrageurs are uncertain about the drift of the dividend process, they condition their investment strategy on the observation of dividends and trading volume. In such a setting, the presence of arbitrageurs can lead to an increase in the equilibrium volatility of asset returns. The arbitrageurs' inference problem ...
Staff Reports , Paper 187

Report
A primer on the economics and time series econometrics of wealth effects: a comment

In a recent paper ("A Primer on the Economics and Time Series Econometrics of Wealth Effects," 2001), Davis and Palumbo investigate the empirical relation between three cointegrated variables: aggregate consumption, asset wealth, and labor income. Although cointegration implies that an equilibrium relation ties these variables together in the long run, the authors focus on the following structural question about the short-run dynamics: "How quickly does consumption adjust to changes in income and wealth? Is the adjustment rapid, occurring within a quarter, or more sluggish, taking place ...
Staff Reports , Paper 131

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