Explore the vast range of titles available.

The ICAPM implies that the market's conditional expected return is proportional to its conditional variance and that the reward-to-risk ratio equals the representative investor's coefficient of relative risk aversion. Prior studies examine this relation using the stock market to proxy for aggregate wealth and find mixed results. We show, however, that stock-based tests suffer from low power and lead to biased estimates of the risk-return tradeoff when stocks are an imperfect market proxy. Tests designed to mitigate this bias by incorporating a more comprehensive measure of aggregate wealth produce large, positive estimates of the risk-aversion coefficient around seven to nine. Supplementary materials for this article are available online.

In this paper we test for the existence of equity market contagion, originating from oil price fluctuations, to regional and domestic stock markets. The data are collected over the period from April 1993 to April 2015. We apply an empirical multifactor asset pricing model with three-factor setting to capture the unexpected return and disentangle simple correlation due to fundamentals and contagion. We investigate four regions: the European Monetary Union (EMU), Asia-Pacific (AP), the Non-European Monetary Union (NEMU) and North America (NA). We define contagion as the excess correlation that is not explained by fundamental factors. Oil price risk is shown to be a factor as important as contagion. In addition, oil price fluctuations amplify contagion in the context of regional markets strongly interlinked with the USA.

This paper derives and tests an intertemporal capital asset pricing model (ICAPM) based on a conditional version of the Campbell-Vuolteenaho two-beta ICAPM (bad beta, good beta (BBGB)). The novel factor is a scaled cash-flow factor that results from the interaction between cash-flow news and a lagged state variable (market dividend yield or consumer price index inflation). The cross-sectional tests over 10 portfolios sorted on size, 10 portfolios sorted on book-to-market, and 10 portfolios sorted on momentum show that the scaled ICAPM explains relatively well the dispersion in excess returns on the 30 portfolios. The results for an alternative set of equity portfolios (25 portfolios sorted on size and momentum) show that the scaled ICAPM prices particularly well the momentum portfolios. Moreover, the scaled ICAPM compares favorably with alternative asset pricing models in pricing both sets of equity portfolios. The scaled factor is decisive to account for the dispersion in average excess returns between past winner and past loser stocks. More specifically, past winners are riskier than past losers in times of high price of risk. Therefore, a time-varying cash-flow beta/price of risk provides a rational explanation for momentum. This paper was accepted by Wei Xiong, finance.

Research background and purpose: The CAPM, Fama-French and modified Fama-French models were used to estimate the cost of the capital of the DJIA and selected Polish stock indexes were used. The estimated cost of capital was the cost of the portfolio of corporate investment projects estimated by market returns. Research methodology: The model tests were run on 276 monthly returns of stocks listed on the markets in the years 1995–2019. The bootstrap method to estimate the confidence interval of the cost of capital was used. Results: The highest and positive cost of capital median was found for the DJIA index, about 0.85% monthly, and for the WIG20 and WIGDIV indexes, about 0.25% monthly. The cost of capital median for the mWIG80, WIGBANK and WIGCHEMIA indexes were found to be negative. This was due to large errors in the estimated cost of capital. Novelty: Minor errors in the estimation of the cost of capital of index DJIA may result from a more rational policy for the implementation of investment projects by companies included in the index.

We argue that the risk of an asset is measured by the covariance of an asset's return with the return on the aggregate market and human capital. The intertemporal and consumption-based CAPM, along with an extended version of CAPM framework examines the excess return on Fama and French portfolios sorted on size-BE/ME and momentum across the economies. The frequently used priced factors in anomaly literature include, Fama and French factors, momentum, dividend yield, bond market factors, saving, along with aggregate market and human capital component. Using unique panel data sets of emerging and developed economies, the panel regression, IV-GMM with random effects and PCA, finds the aggregate market and human capital are the strongest predictors of asset returns across the economies. Furthermore, the aggregate market and saving are strong predictors of asset return in emerging economies, whereas aggregate market and human capital emerge the best predictors of asset return in developed economies. Interestingly, human capital subsumes the predictive ability of Fama and French factors and becomes redundant along with momentum, dividend yield, and bond market factors.

We uncover a strong comovement of the stock market risk—return trade-off with the consumption—wealth ratio (CAY). The finding reflects time-varying investment opportunities rather than countercyclical aggregate relative risk aversion. Specifically, the partial risk—return trade-off is positive and constant when we control for CAY as a proxy for investment opportunities. Moreover, conditional market variance scaled by CAY is negatively priced in the cross-section of stock returns. Our results are consistent with a limited stock market participation model, in which shareholders require an illiquidity premium that increases with CAY, in addition to the risk premium that is proportional to conditional market variance.

This work is an attempt to estimate the cost of equity capital characteristic among portfolios of companies listed on the Warsaw Stock Exchange in the years 1995-2017. To this end, the classic CAPM is used to estimate the cost of risk. Model tests are based on 252 monthly returns. In order to assess the errors of cost of capital estimation, the bootstrap method is used. The estimated cost of capital refers to the project portfolio with real options on these projects. Stock returns are generated not only by the companies implementing projects but also through real options modifying these projects. The estimated cost of capital can be a valuable indicator for portfolio managers. Also, it can be an approximate indicator for making decisions on the implementation of new investment projects. The estimated cost of capital assumes the highest values for value portfolios. The estimated cost of capital assumes the small values for growth portfolios.

This paper derives an equilibrium asset pricing model with endogenous liquidity risk, portfolio constraints, and asset price bubbles. Liquidity risk is modeled as a stochastic quantity impact on the price from trading, where the size of the impact depends on trade size. Asset price bubbles are generated by the existence of portfolio constraints, e.g. short sale prohibitions and margin requirements. Under a restrictive set of assumptions, we prove a unique equilibrium price process exists for our economy. We characterize the market’s state price density, which enables the derivation of the risk-return relation for the stock’s expected return including both liquidity risk and asset price bubbles. This yields a generalized intertemporal and consumption CAPM for our economy. In contrast to the traditional models without liquidity risk or asset price bubbles, there are additional systematic liquidity risk and asset price bubble factors which are related to the stock return’s covariation with liquidity risk and asset price bubbles.

We test the new Fama and French five-factor model on a sample of hedge fund strategies. This model embeds the q -factor asset pricing model which lies on the CMA and RMW factors. We find that the HML factor is not redundant for many strategies, as conjectured by Fama and French in their setting. HML seems to embed risk dimensions which are not included in the Fama and French new factors. In contrast to Fama and French, the α puzzle is robust to the addition of CMA and RMW . Furthermore, hedge funds seem to prefer, on the one hand, firms which invest a lot to firms which invest less, and, on the other hand, weak firms over robust ones. Finally, our results are not sensitive to the addition of the Fung and Hsieh seven-factor model. However, the explanatory power of the eleven-factor model is much higher for some hedge fund strategies involved in arbitrage.