Essays on macro factors and asset pricing [electronic resource] : theory and evaluation /
Macro Factors and Asset Pricing:
Theory and Evaluation
of 4 essays.
My essays deal with macro factors and the cross sectional asset prices. It consists
My first essay consider asset pricing in a monetary economy where liquid assets
are held to lower transaction costs. The ensuing model extends the CAPM and the
Consumption CAPM by deriving real money growth as an additional factor determining
returns and they compare favorably to other theoretical asset pricing models. The paper
further introduces a technique that facilitates derivation of dynamic asset pricing results
in discrete time by generalizing Stein’s Lemma to multivariate cases.
My second essay considers asset pricing from the production side. Relying on a
general version of the traditional Real Business Cycle macro model we find that the
variables determining the mean returns of all financial assets are the productivity shock
as the sole factor together with the capital stock and productivity level as conditioning
variables. The model explains the size premium from differences in the unconditional
sensitivity to productivity shocks and explains the value premium from differences in the
conditional sensitivity to productivity shocks.
In my third essay we develop a measure previously considered by Kandel and
Stambaugh (1995) to evaluate linear asset pricing models. The “KS-ratio” criterion rates
a model’s usefulness based on the mean portfolio return, for any given variance choice,
obtained by a mean-variance decision maker using the model for optimal portfolio
decisions. The KS-ratio together with the HJ-distance and several ad hoc evaluation
criteria are applied to nine prominent asset pricing models. We find that it is necessary to
correct for the number of factors and that this correction makes a substantial difference
for model rankings.
Cooper, Gutierrez and Hameed (2004) find that momentum profits derive from
the “up” market; they claim that this is due to investor overconfidence. My fourth essay
examines their proposition in an international context and finds qualified support:
momentum profits exist only in the up market but this holds for only two of three market
state classifications based on past returns. A further test using lagged world industrial
production growth to classify market states largely supports the proposition.
School:West Virginia University
School Location:USA - West Virginia
Source Type:Master's Thesis
Keywords:money supply capital assets pricing model portfolio management
Date of Publication: