Broker-Dealer Leverage and the Cross-Section of Stock Returns 1

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "Broker-Dealer Leverage and the Cross-Section of Stock Returns 1"

Transcription

1 Broker-Dealer Leverage and the Cross-Section of Stock Returns 1 Tobias Adrian, Erkko Etula and Tyler Muir Federal Reserve Bank of New York and Northwestern University Bank of England, January -5, 11 1 The views expressed in this paper are those of the authors and do not necessarily represent those of the Federal Reserve Bank of New York or the Federal Reserve System.

2 Aggregate mplications of Financial ntermediaries The nancial crisis of 7-9 suggests that nancial intermediary balance sheet management has aggregate consequence The expansion and contraction of nancial intermediaries is associated with the asset price boom and bust Systemic risk arises when asset price declines are associated with disorderly unwinding of intermediary balance sheets Contrast internet stock price crash to housing price decline We provide evidence that asset price valuations are systematically tied to the balance sheet behavior of intermediaries Asset pricing approach: Merton s (1973) CAPM ntermediary leverage key variable for systemic risk because it is tied to asset valuations

3 Adrian and Shin (1) Liquidity and Leverage

4 Adrian and Shin (1) Liquidity and Leverage

5 Adrian and Shin (1) Changing Nature of Financial ntermediation

6 Realized Mean Return Asset Pricing Anomalies Failure of the CAPM in the cross-section of stock returns Vast literature developed to address such failures: size, value, momentum, long-term reversal,... CAPM: Pricing the Cross Section of 5 Size and B/M Sorted Porfolios S1B5 S3B5 S1B SB5 SB SB5 SB3 S3B SB S1B3 S3B3 S3B S1B SB3 SB S5B5 S5B SB SB1 S5B S5B3 MktFac S5B1 S3B1 SB1.5 S1B

7 Broker-Dealer Asset Pricing Premise is that nancial intermediaries matter for risk premium determination Several theories are presented in the literature Gromb and Vayanos (9), He and Krishnamurthy (9), Danielson, Shin and Zigrand (9), Gârleanu and Pedersen (1) We motivate our empirical investigation with an CAPM setup that is giving rise to a multifactor asset pricing model Multifactor asset pricing explanations of pricing anomalies have proven successful in the past What is new is the focus on the pricing variable: broker-dealer leverage

8 ntuition CAPM Premise: Shocks to investment opportunities a ect portfolio choice e.g. technology shocks, nancial shocks, demand shocks and hence, matter for the equilibrium pricing of risky assets

9 ntuition CAPM Premise: Shocks to investment opportunities a ect portfolio choice e.g. technology shocks, nancial shocks, demand shocks and hence, matter for the equilibrium pricing of risky assets Risk premia can uncover aggregate state variables Problem: most investors are passive, their portfolio choice is hard to understand

10 ntuition CAPM Premise: Shocks to investment opportunities a ect portfolio choice e.g. technology shocks, nancial shocks, demand shocks and hence, matter for the equilibrium pricing of risky assets Risk premia can uncover aggregate state variables Problem: most investors are passive, their portfolio choice is hard to understand We isolate a group of active [securities brokers and dealers]: Portfolio optimization easier to understand Aggressive, active adjustment of leverage High leverage low U W, low risk premia

11 ntertemporal Asset Pricing The equilibrium asset pricing implication of the CAPM is: E dr i = Cov dr i, dr M Γ + Cov dr i, dx F, where dr M is excess market return and Γ and F are prices of risk. There are two agents A and P. The model so far is a completely general two-agent CAPM x, Γ, F not pinned down

12 ntertemporal Asset Pricing The equilibrium asset pricing implication of the CAPM is: E dr i = Cov dr i, dr M Γ + Cov dr i, dx F, where dr M is excess market return and Γ and F are prices of risk. There are two agents A and P. The model so far is a completely general two-agent CAPM x, Γ, F not pinned down Next, consider a particular example with: 1. Active investors: Leveraged nancial intermediaries (broker-dealers); manage leverage procyclically Maximize expected equity return s.t. a VaR constraint E ective risk aversion γ A proportional to the Lagrange multiplier on the VaR constraint. Passive investors: Rest of the economy (rest of nancials, non- nancial rms, households) Myopic mean-variance optimizers with constant γ P

13 Application: CAPM with Financial ntermediaries We show that, in equilibrium, the e ective risk aversion γ A : s proportional to the economy s generalized sharpe ratio Has the following representation: γ A = γ A x 1 + γ A 1 x

14 Application: CAPM with Financial ntermediaries We show that, in equilibrium, the e ective risk aversion γ A : s proportional to the economy s generalized sharpe ratio Has the following representation: γ A = γ A x 1 + γ A 1 x Constants γ A, γa 1 depend on the parameters of the model State variables x 1, x are: x 1 = 1 lev A, x = w A w P 1 lev A. Puts intermediary leverage in the pricing kernel: E t rt+1 i = Cov t r t+1, i rt+1 M Γ t Cov t rt+1, i x t+1 Ft

15 State Variables

16 mplications Shocks to broker-dealer leverage may be priced in the cross-section of stock returns:

17 mplications Shocks to broker-dealer leverage may be priced in the cross-section of stock returns: Motivates the cross-sectional regression [Fama-MacBeth]: Er i = α + β im λ M + β ix λ x + error i, β im is the market beta with risk premium λ M β ix are additional risk exposures with risk premia λ x Betas can be estimated from the time-series regression: r i t+1 = a i + β im r M t+1 + β ix x t+1 + error i t+1, x t+1 = x t+1 E t x t+1 are innovations to the state variables: x 1 = 1 {z lev BD, x = w BD 1 } w Non-BD lev BD. {z } Capital Ratio Scaled Wealth

18 Data (Q1/ Q/9) Aggregate Balance Sheet Variables: Total nancial assets and total nancial liabilities of U.S. securities broker-dealers and the rest of the U.S. economy From the Federal Reserve s Flow of Funds database (quarterly)

19 Data (Q1/ Q/9) Aggregate Balance Sheet Variables: Total nancial assets and total nancial liabilities of U.S. securities broker-dealers and the rest of the U.S. economy From the Federal Reserve s Flow of Funds database (quarterly) Equity Portfolios and Additional Factors: 3 ndustry, 5 Size and B/M, 5 Size and Momentum, 5 Size and Long-Term Reversal, 5 Size and Short-Term Reversal MKT, HML, SMB, MOM, LTREV, STREV From Ken French s website

20 Data (Q1/ Q/9) Aggregate Balance Sheet Variables: Total nancial assets and total nancial liabilities of U.S. securities broker-dealers and the rest of the U.S. economy From the Federal Reserve s Flow of Funds database (quarterly) Equity Portfolios and Additional Factors: 3 ndustry, 5 Size and B/M, 5 Size and Momentum, 5 Size and Long-Term Reversal, 5 Size and Short-Term Reversal MKT, HML, SMB, MOM, LTREV, STREV From Ken French s website Address the critique of Lewellen, Nagel, Shanken (1) Large set of test assets (not only Size and B/M) nclude priced factors as test assets Take cross-sectional alphas seriously

21 5 Size and Book/Market Portfolios Benchmarks Broker-Dealer Models (i) (ii) (iii) (iv) (v) (vi) Constant (3.18) (-.681) (.733) (1.65) (1.78) (.97) Leverage (-3.6) (-3.766) (-3.96) (-3.57) Scaled Wealth (.888) (.36) Market (.) (.57) (1.73) (1.) SMB (1.395) (1.18) HML (.98) (1.815) R-Squared 3% 6% 57% 67% 68% 73% Adj. R-Squared -1% 57% 55% 6% 6% 68%

22 Realized Mean Return Realized Mean Return Realized Mean Return Realized Mean Return 5 Size and Book/Market Portfolios CAPM 1 Factor Broker Dealer Model Factor Benchmark Model Factor Broker Dealer Model

23 5 Size and Momentum Sorted Portfolios Benchmarks Broker-Dealer Models (i) (ii) (iii) (iv) (v) (vi) Constant (.368) (1.9) (.355) (.71) (-1.3) (-1.5) Leverage (-3.753) (-3.1) (-.761) (-3.98) Scaled Wealth (-1.86) (-1.7) Market (-.33) (1.967) (.53) (.398) SMB.1.17 (1.71) (1.575) Momentum (3.35) (3.8) R-Squared 1% 8% 76% 76% 77% 89% Adj. R-Squared -3% 77% 75% 7% 7% 87%

24 Realized Mean Return Realized Mean Return Realized Mean Return Realized Mean Return 5 Size and Momentum Sorted Portfolios 6 CAPM 1 Factor Broker Dealer Model 6 3 Factor Benchmark Model 6 3 Factor Broker Dealer Model 6

25 3 ndustry Portfolios Benchmarks Broker-Dealer Models (i) (ii) (iii) (iv) (v) (vi) Constant (3.81) (.7) (1.588) (1.87) (3.51) (3.955) Leverage (-1.67) (-1.87) (-1.81) (-1.77) Scaled Wealth (-1.81) (-1.3) Market.... (.19) (.57) (.) (.53) SMB (-.866) (-.86) HML (-.9) (-.537) R-Squared 1% 15% 7% 8% 57% 36% Adj. R-Squared -% 6% % % 5% 7%

26 Realized Mean Return Realized Mean Return Realized Mean Return Realized Mean Return 3 ndustry Portfolios CAPM 1 Factor Broker Dealer Model Factor Benchmark Model Factor Broker Dealer Model

27 5 Size and Book/Market and 1 Momentum, 3 ndustry Benchmarks Broker-Dealer Models (i) (ii) (iii) (iv) (v) (vi) Constant (5.131) (6.91) (.53) (.89) (1.38) (3.6) Leverage (-.17) (-.19) (-.71) Scaled Wealth (-.799) (-.73) Market (-.7) (-.53) (1.1) (.58) SMB.1.38 (.67) (.78) HML.3.87 (.73) (1.) Momentum.19 (.8) R-Squared 1% 3% 5% 6% 5% 6% Adj. R-Squared -1% -% % 5% 8% %

28 Realized Mean Return Realized Mean Return Realized Mean Return Realized Mean Return 5 Size and Book/Market and 1 Momentum, 3 ndustry Portfolios CAPM 1 Factor Broker Dealer Model 3 Factor Benchmark Model 3 Factor Broker Dealer Model

29 Conclusion Our results suggest that the Broker-Dealer pricing model may provide a common explanation for many asset pricing puzzles The broker-dealer pricing model ties asset price movements to the balance sheet management of nancial intermediaries Systemic risk arises when asset price declines are associated with disorderly unwinding of leverage The disorderly unwinding has been particularly important in the nancial crisis

Financial Intermediaries and the Cross-Section of Asset Returns

Financial Intermediaries and the Cross-Section of Asset Returns Financial Intermediaries and the Cross-Section of Asset Returns Tobias Adrian - Federal Reserve Bank of New York 1 Erkko Etula - Goldman Sachs Tyler Muir - Kellogg School of Management May, 2012 1 The

More information

Financial Intermediaries and the Cross-Section of Asset Returns

Financial Intermediaries and the Cross-Section of Asset Returns Financial Intermediaries and the Cross-Section of Asset Returns Tobias Adrian tobias.adrian@ny.frb.org Erkko Etula etula@post.harvard.edu Tyler Muir t-muir@kellogg.northwestern.edu August 2013 Capital

More information

Federal Reserve Bank of New York Staff Reports

Federal Reserve Bank of New York Staff Reports Federal Reserve Bank of New York Staff Reports Financial Intermediaries and the Cross-Section of Asset Returns Tobias Adrian Erkko Etula Tyler Muir Staff Report no. 464 July 2010 Revised April 2011 This

More information

econstor zbw www.econstor.eu

econstor zbw www.econstor.eu econstor www.econstor.eu Der Open-Access-Publikationsserver der ZBW Leibniz-Informationszentrum Wirtschaft The Open Access Publication Server of the ZBW Leibniz Information Centre for Economics Adrian,

More information

Broker-Dealer Leverage and the Cross-Section of Stock Returns

Broker-Dealer Leverage and the Cross-Section of Stock Returns Broker-Dealer Leverage and the Cross-Section of Stock Returns Tobias Adrian tobias.adrian@ny.frb.org Erkko Etula etula@post.harvard.edu Tyler Muir t-muir@kellogg.northwestern.edu January 2011 Abstract

More information

Dynamic Leverage Asset Pricing

Dynamic Leverage Asset Pricing Dynamic Leverage Asset Pricing Tobias Adrian Emanuel Moench Hyun Song Shin This version: February 28, 2015 Abstract We empirically investigate predictions from alternative intermediary asset pricing theories.

More information

The Cost of Capital of the Financial Sector

The Cost of Capital of the Financial Sector Federal Reserve Bank of New York Staff Reports The Cost of Capital of the Financial Sector Tobias Adrian Evan Friedman Tyler Muir Staff Report No. 755 December 2015 This paper presents preliminary findings

More information

The Supply and Demand of S&P 500 Put Options

The Supply and Demand of S&P 500 Put Options The Supply and Demand of S&P 500 Put Options George Constantinides University of Chicago Lei Lian University of Massachusetts at Amherst October 28 2015 George Constantinides; Lei Lian The Supply and Demand

More information

René Garcia Professor of finance

René Garcia Professor of finance Liquidity Risk: What is it? How to Measure it? René Garcia Professor of finance EDHEC Business School, CIRANO Cirano, Montreal, January 7, 2009 The financial and economic environment We are living through

More information

Online Appendix for External Equity Financing Shocks, Financial Flows, and Asset Prices

Online Appendix for External Equity Financing Shocks, Financial Flows, and Asset Prices NOT FOR PUBLICATION Online Appendix for External Equity Financing Shocks, Financial Flows, and Asset Prices FREDERICO BELO, XIAOJI LIN, AND FAN YANG 1 This appendix contains tables and figures that supplement

More information

Optimal Debt-to-Equity Ratios and Stock Returns

Optimal Debt-to-Equity Ratios and Stock Returns Utah State University DigitalCommons@USU All Graduate Plan B and other Reports Graduate Studies 3-2014 Optimal Debt-to-Equity Ratios and Stock Returns Courtney D. Winn Utah State University Follow this

More information

CAPM, Arbitrage, and Linear Factor Models

CAPM, Arbitrage, and Linear Factor Models CAPM, Arbitrage, and Linear Factor Models CAPM, Arbitrage, Linear Factor Models 1/ 41 Introduction We now assume all investors actually choose mean-variance e cient portfolios. By equating these investors

More information

Demand for Crash Insurance, Intermediary Constraints, and Stock Returns

Demand for Crash Insurance, Intermediary Constraints, and Stock Returns Demand for Crash Insurance, Intermediary Constraints, and Stock Returns Hui Chen, Scott Joslin, Sophie Ni June 4, 2013 Options market and risk sharing Options market is huge (global exchange-traded derivatives

More information

Asset Management Contracts and Equilibrium Prices

Asset Management Contracts and Equilibrium Prices Asset Management Contracts and Equilibrium Prices ANDREA M. BUFFA DIMITRI VAYANOS PAUL WOOLLEY Boston University London School of Economics London School of Economics September, 2013 Abstract We study

More information

Risk Appetite and Commodity Returns

Risk Appetite and Commodity Returns Risk Appetite and Commodity Returns Erkko Etula Harvard University etula@fas.harvard.edu February 2009 Abstract This paper shows that the risk appetite of leveraged nancial institutions such as security

More information

Discussion of Betermier, Calvet, and Sodini Who are the Value and Growth Investors?

Discussion of Betermier, Calvet, and Sodini Who are the Value and Growth Investors? Discussion of Betermier, Calvet, and Sodini Who are the Value and Growth Investors? NBER Summer Institute Asset Pricing Meeting July 11 2014 Jonathan A. Parker MIT Sloan finance Outline 1. Summary 2. Value

More information

When is the price of risk high?

When is the price of risk high? When is the price of risk high? Alan Moreira and Tyler Muir September, 2015 Abstract We show that the price of risk and quantity of risk are negatively correlated in the time-series for benchmark factors

More information

This paper is not to be removed from the Examination Halls

This paper is not to be removed from the Examination Halls ~~FN3023 ZA d0 This paper is not to be removed from the Examination Halls UNIVERSITY OF LONDON FN3023 ZA BSc degrees and Diplomas for Graduates in Economics, Management, Finance and the Social Sciences,

More information

Broker-Dealer Risk Appetite and Commodity Returns

Broker-Dealer Risk Appetite and Commodity Returns Broker-Dealer Risk Appetite and Commodity Returns Erkko Etula Federal Reserve Bank of New York erkko.etula@ny.frb.org First Draft: November 2008 This Draft: November 2009 Abstract This paper shows that

More information

Who is Warren Buffett?

Who is Warren Buffett? Who is Warren Buffett? Buffet-Falk & Co., Omaha, Investment Salesman Became the richest man in the world Born in Omaha, Nebraska Begins the Buffett Partnership 30 50 52 54 56 70 08 12 M.S. in Economics,

More information

Lecture 1: Asset pricing and the equity premium puzzle

Lecture 1: Asset pricing and the equity premium puzzle Lecture 1: Asset pricing and the equity premium puzzle Simon Gilchrist Boston Univerity and NBER EC 745 Fall, 2013 Overview Some basic facts. Study the asset pricing implications of household portfolio

More information

Norges Bank s Expert Group on Principles for Risk Adjustment of Performance Figures Final Report

Norges Bank s Expert Group on Principles for Risk Adjustment of Performance Figures Final Report Norges Bank s Expert Group on Principles for Risk Adjustment of Performance Figures Final Report November 16, 2015 Magnus Dahlquist Professor, Stockholm School of Economics Christopher Polk Professor,

More information

Appendices with Supplementary Materials for CAPM for Estimating Cost of Equity Capital: Interpreting the Empirical Evidence

Appendices with Supplementary Materials for CAPM for Estimating Cost of Equity Capital: Interpreting the Empirical Evidence Appendices with Supplementary Materials for CAPM for Estimating Cost of Equity Capital: Interpreting the Empirical Evidence This document contains supplementary material to the paper titled CAPM for estimating

More information

Betting Against Beta in the Indian Market

Betting Against Beta in the Indian Market INDIAN INSTITUTE OF MANAGEMENT AHMEDABAD INDIA Betting Against Beta in the Indian Market Sobhesh Kumar Agarwalla, Joshy Jacob, Jayanth R. Varma & Ellapulli Vasudevan W.P. No. 2014-07-01 July 2014 The main

More information

The Tangent or Efficient Portfolio

The Tangent or Efficient Portfolio The Tangent or Efficient Portfolio 1 2 Identifying the Tangent Portfolio Sharpe Ratio: Measures the ratio of reward-to-volatility provided by a portfolio Sharpe Ratio Portfolio Excess Return E[ RP ] r

More information

Value, momentum, and short-term interest rates

Value, momentum, and short-term interest rates Value, momentum, and short-term interest rates Paulo Maio 1 Pedro Santa-Clara 2 First version: July 2011 This version: December 2011 3 1 Hanken School of Economics. E-mail: paulofmaio@gmail.com. 2 Millennium

More information

DOES IT PAY TO HAVE FAT TAILS? EXAMINING KURTOSIS AND THE CROSS-SECTION OF STOCK RETURNS

DOES IT PAY TO HAVE FAT TAILS? EXAMINING KURTOSIS AND THE CROSS-SECTION OF STOCK RETURNS DOES IT PAY TO HAVE FAT TAILS? EXAMINING KURTOSIS AND THE CROSS-SECTION OF STOCK RETURNS By Benjamin M. Blau 1, Abdullah Masud 2, and Ryan J. Whitby 3 Abstract: Xiong and Idzorek (2011) show that extremely

More information

QUANTITATIVE FINANCIAL ECONOMICS

QUANTITATIVE FINANCIAL ECONOMICS Ill. i,t.,. QUANTITATIVE FINANCIAL ECONOMICS STOCKS, BONDS AND FOREIGN EXCHANGE Second Edition KEITH CUTHBERTSON AND DIRK NITZSCHE HOCHSCHULE John Wiley 8k Sons, Ltd CONTENTS Preface Acknowledgements 2.1

More information

Review for Exam 2. Instructions: Please read carefully

Review for Exam 2. Instructions: Please read carefully Review for Exam 2 Instructions: Please read carefully The exam will have 25 multiple choice questions and 5 work problems You are not responsible for any topics that are not covered in the lecture note

More information

Chapter 5. Conditional CAPM. 5.1 Conditional CAPM: Theory. 5.1.1 Risk According to the CAPM. The CAPM is not a perfect model of expected returns.

Chapter 5. Conditional CAPM. 5.1 Conditional CAPM: Theory. 5.1.1 Risk According to the CAPM. The CAPM is not a perfect model of expected returns. Chapter 5 Conditional CAPM 5.1 Conditional CAPM: Theory 5.1.1 Risk According to the CAPM The CAPM is not a perfect model of expected returns. In the 40+ years of its history, many systematic deviations

More information

Review for Exam 2. Instructions: Please read carefully

Review for Exam 2. Instructions: Please read carefully Review for Exam Instructions: Please read carefully The exam will have 1 multiple choice questions and 5 work problems. Questions in the multiple choice section will be either concept or calculation questions.

More information

CFA Examination PORTFOLIO MANAGEMENT Page 1 of 6

CFA Examination PORTFOLIO MANAGEMENT Page 1 of 6 PORTFOLIO MANAGEMENT A. INTRODUCTION RETURN AS A RANDOM VARIABLE E(R) = the return around which the probability distribution is centered: the expected value or mean of the probability distribution of possible

More information

Betting Against Beta

Betting Against Beta Betting Against Beta Andrea Frazzini AQR Capital Management LLC Lasse H. Pedersen NYU, CEPR, and NBER Preliminary Copyright 2010 by Andrea Frazzini and Lasse H. Pedersen Motivation Background: Security

More information

HARVARD UNIVERSITY Department of Economics

HARVARD UNIVERSITY Department of Economics HARVARD UNIVERSITY Department of Economics Economics 970 Behavioral Finance Science Center 103b Spring 2002 M, W 7-8:30 pm Mr. Evgeny Agronin Teaching Fellow agronin@fas.harvard.edu (617) 868-5766 Course

More information

Chapter 7 Risk, Return, and the Capital Asset Pricing Model

Chapter 7 Risk, Return, and the Capital Asset Pricing Model Chapter 7 Risk, Return, and the Capital Asset Pricing Model MULTIPLE CHOICE 1. Suppose Sarah can borrow and lend at the risk free-rate of 3%. Which of the following four risky portfolios should she hold

More information

Fama and French Three-Factor Model: Evidence from Istanbul Stock Exchange

Fama and French Three-Factor Model: Evidence from Istanbul Stock Exchange Volume 4 Number 2 2013 pp. 11-22 ISSN: 1309-2448 www.berjournal.com Fama and French Three-Factor Model: Evidence from Istanbul Stock Exchange Veysel Eraslan a Abstract: This study tests the validity of

More information

Problem Set 6 - Solutions

Problem Set 6 - Solutions ECO573 Financial Economics Problem Set 6 - Solutions 1. Debt Restructuring CAPM. a Before refinancing the stoc the asset have the same beta: β a = β e = 1.2. After restructuring the company has the same

More information

A Behavioral Economics Exploration into the Volatility Anomaly *

A Behavioral Economics Exploration into the Volatility Anomaly * Policy Research Institute, Ministry of Finance, Japan, Public Policy Review, Vol.9, No.3, September 2013 457 A Behavioral Economics Exploration into the Volatility Anomaly * The NUCB Graduate School Equity

More information

The CAPM (Capital Asset Pricing Model) NPV Dependent on Discount Rate Schedule

The CAPM (Capital Asset Pricing Model) NPV Dependent on Discount Rate Schedule The CAPM (Capital Asset Pricing Model) Massachusetts Institute of Technology CAPM Slide 1 of NPV Dependent on Discount Rate Schedule Discussed NPV and time value of money Choice of discount rate influences

More information

Market Efficiency and Behavioral Finance. Chapter 12

Market Efficiency and Behavioral Finance. Chapter 12 Market Efficiency and Behavioral Finance Chapter 12 Market Efficiency if stock prices reflect firm performance, should we be able to predict them? if prices were to be predictable, that would create the

More information

Corporate Income Tax and Stock Returns

Corporate Income Tax and Stock Returns Corporate Income Tax and Stock Returns [Preliminary Draft] Alexander Schiller September 9, 2015 Abstract This paper examines the implications of corporate income taxes for the crosssection of stock returns.

More information

A Panel Data Analysis of Corporate Attributes and Stock Prices for Indian Manufacturing Sector

A Panel Data Analysis of Corporate Attributes and Stock Prices for Indian Manufacturing Sector Journal of Modern Accounting and Auditing, ISSN 1548-6583 November 2013, Vol. 9, No. 11, 1519-1525 D DAVID PUBLISHING A Panel Data Analysis of Corporate Attributes and Stock Prices for Indian Manufacturing

More information

Portfolio Performance Measures

Portfolio Performance Measures Portfolio Performance Measures Objective: Evaluation of active portfolio management. A performance measure is useful, for example, in ranking the performance of mutual funds. Active portfolio managers

More information

International Stock Market Integration: A Dynamic General Equilibrium Approach

International Stock Market Integration: A Dynamic General Equilibrium Approach International Stock Market Integration: A Dynamic General Equilibrium Approach Harjoat S. Bhamra London Business School 2003 Outline of talk 1 Introduction......................... 1 2 Economy...........................

More information

CHAPTER 10 RISK AND RETURN: THE CAPITAL ASSET PRICING MODEL (CAPM)

CHAPTER 10 RISK AND RETURN: THE CAPITAL ASSET PRICING MODEL (CAPM) CHAPTER 10 RISK AND RETURN: THE CAPITAL ASSET PRICING MODEL (CAPM) Answers to Concepts Review and Critical Thinking Questions 1. Some of the risk in holding any asset is unique to the asset in question.

More information

What is Venture Capital?

What is Venture Capital? Venture Capital Topics Covered Definition of Venture Capital Activities of Venture Capitalists Organization Structure of Venture Capital History of Venture Capital Patterns of Venture Capital Investment

More information

MODERN PORTFOLIO THEORY AND INVESTMENT ANALYSIS

MODERN PORTFOLIO THEORY AND INVESTMENT ANALYSIS MODERN PORTFOLIO THEORY AND INVESTMENT ANALYSIS EIGHTH EDITION INTERNATIONAL STUDENT VERSION EDWIN J. ELTON Leonard N. Stern School of Business New York University MARTIN J. GRUBER Leonard N. Stern School

More information

Volatility Managed Portfolios

Volatility Managed Portfolios Volatility Managed Portfolios Alan Moreira and Tyler Muir April 11, 2016 Abstract Managed portfolios that take less risk when volatility is high produce large alphas and substantially increase factor Sharpe

More information

Foundations of Asset Management Goal-based Investing the Next Trend

Foundations of Asset Management Goal-based Investing the Next Trend Foundations of Asset Management Goal-based Investing the Next Trend Robert C. Merton Distinguished Professor of Finance MIT Finance Forum May 16, 2014 #MITSloanFinance 1 Agenda Goal-based approach to investment

More information

OULU BUSINESS SCHOOL. Jesse Väisänen EMBEDDED LEVERAGE AND PERFORMANCE OF HEDGE FUND SHARE CLASSES

OULU BUSINESS SCHOOL. Jesse Väisänen EMBEDDED LEVERAGE AND PERFORMANCE OF HEDGE FUND SHARE CLASSES OULU BUSINESS SCHOOL Jesse Väisänen EMBEDDED LEVERAGE AND PERFORMANCE OF HEDGE FUND SHARE CLASSES Master s Thesis Department of Finance August 2013 UNIVERSITY OF OULU Oulu Business School Unit Department

More information

Asset Pricing of Financial Institutions: The Cross-Section of Expected Insurance Stock Returns

Asset Pricing of Financial Institutions: The Cross-Section of Expected Insurance Stock Returns Asset Pricing of Financial Institutions: The Cross-Section of Expected Insurance Stock Returns Semir Ben Ammar a,*, Martin Eling a and Andreas Milidonis b This version: 2015/01/12 Abstract Two unsolved

More information

Chapter 11. Topics Covered. Chapter 11 Objectives. Risk, Return, and Capital Budgeting

Chapter 11. Topics Covered. Chapter 11 Objectives. Risk, Return, and Capital Budgeting Chapter 11 Risk, Return, and Capital Budgeting Topics Covered Measuring Market Risk Portfolio Betas Risk and Return CAPM and Expected Return Security Market Line CAPM and Stock Valuation Chapter 11 Objectives

More information

The Equity Risk Premium, the Liquidity Premium, and Other Market Premiums. What is the Equity Risk Premium?

The Equity Risk Premium, the Liquidity Premium, and Other Market Premiums. What is the Equity Risk Premium? The Equity Risk, the, and Other Market s Roger G. Ibbotson Professor, Yale School of Management Canadian Investment Review Investment Innovation Conference Bermuda November 2011 1 What is the Equity Risk?

More information

LIQUIDITY AND ASSET PRICING. Evidence for the London Stock Exchange

LIQUIDITY AND ASSET PRICING. Evidence for the London Stock Exchange LIQUIDITY AND ASSET PRICING Evidence for the London Stock Exchange Timo Hubers (358022) Bachelor thesis Bachelor Bedrijfseconomie Tilburg University May 2012 Supervisor: M. Nie MSc Table of Contents Chapter

More information

Leverage Constraints and Asset Prices: Insights from Mutual Fund Risk Taking

Leverage Constraints and Asset Prices: Insights from Mutual Fund Risk Taking Leverage Constraints and Asset Prices: Insights from Mutual Fund Risk Taking Oliver Boguth and Mikhail Simutin February 17, 2015 ABSTRACT Prior theory suggests that time variation in the degree to which

More information

Internet Appendix to CAPM for estimating cost of equity capital: Interpreting the empirical evidence

Internet Appendix to CAPM for estimating cost of equity capital: Interpreting the empirical evidence Internet Appendix to CAPM for estimating cost of equity capital: Interpreting the empirical evidence This document contains supplementary material to the paper titled CAPM for estimating cost of equity

More information

Federal Reserve Bank of New York Staff Reports

Federal Reserve Bank of New York Staff Reports Federal Reserve Bank of New York Staff Reports Financial Intermediation, Asset Prices, and Macroeconomic Dynamics Tobias Adrian Emanuel Moench Hyun Song Shin Staff Report no. 422 January 2010 Revised September

More information

Federal Reserve Bank of New York Staff Reports

Federal Reserve Bank of New York Staff Reports Federal Reserve Bank of New York Staff Reports Financial Intermediaries and Monetary Economics Tobias Adrian Hyun Song Shin Staff Report no. 398 October 2009 Revised May 2010 This paper presents preliminary

More information

What Level of Incentive Fees Are Hedge Fund Investors Actually Paying?

What Level of Incentive Fees Are Hedge Fund Investors Actually Paying? What Level of Incentive Fees Are Hedge Fund Investors Actually Paying? Abstract Long-only investors remove the effects of beta when analyzing performance. Why shouldn t long/short equity hedge fund investors

More information

Solution: The optimal position for an investor with a coefficient of risk aversion A = 5 in the risky asset is y*:

Solution: The optimal position for an investor with a coefficient of risk aversion A = 5 in the risky asset is y*: Problem 1. Consider a risky asset. Suppose the expected rate of return on the risky asset is 15%, the standard deviation of the asset return is 22%, and the risk-free rate is 6%. What is your optimal position

More information

The Capital Asset Pricing Model (CAPM)

The Capital Asset Pricing Model (CAPM) Prof. Alex Shapiro Lecture Notes 9 The Capital Asset Pricing Model (CAPM) I. Readings and Suggested Practice Problems II. III. IV. Introduction: from Assumptions to Implications The Market Portfolio Assumptions

More information

The Stock Market Price of Commodity Risk

The Stock Market Price of Commodity Risk + The Stock Market Price of Commodity Risk Bank of Canada Workshop on Financialization of Commodity Markets 21 March 2014 Martijn Boons, Nova School of Business and Economics Frans de Roon, Tilburg University,

More information

A Market-Based Funding Liquidity Measure

A Market-Based Funding Liquidity Measure A Market-Based Funding Liquidity Measure Zhuo Chen Andrea Lu First draft: June 2013 This draft: May 2014 Abstract In this paper, we construct a tradable funding liquidity measure from stock returns. Using

More information

NBER WORKING PAPER SERIES CARRY TRADES AND RISK. Craig Burnside. Working Paper 17278 http://www.nber.org/papers/w17278

NBER WORKING PAPER SERIES CARRY TRADES AND RISK. Craig Burnside. Working Paper 17278 http://www.nber.org/papers/w17278 NBER WORKING PAPER SERIES CARRY TRADES AND RISK Craig Burnside Working Paper 17278 http://www.nber.org/papers/w17278 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 August

More information

The Cross-Section of Volatility and Expected Returns

The Cross-Section of Volatility and Expected Returns THE JOURNAL OF FINANCE VOL. LXI, NO. 1 FEBRUARY 2006 The Cross-Section of Volatility and Expected Returns ANDREW ANG, ROBERT J. HODRICK, YUHANG XING, and XIAOYAN ZHANG ABSTRACT We examine the pricing of

More information

Best Styles: Harvesting Risk Premium in Equity Investing

Best Styles: Harvesting Risk Premium in Equity Investing Strategy Best Styles: Harvesting Risk Premium in Equity Investing Harvesting risk premiums is a common investment strategy in fixed income or foreign exchange investing. In equity investing it is still

More information

Chap 3 CAPM, Arbitrage, and Linear Factor Models

Chap 3 CAPM, Arbitrage, and Linear Factor Models Chap 3 CAPM, Arbitrage, and Linear Factor Models 1 Asset Pricing Model a logical extension of portfolio selection theory is to consider the equilibrium asset pricing consequences of investors individually

More information

B.3. Robustness: alternative betas estimation

B.3. Robustness: alternative betas estimation Appendix B. Additional empirical results and robustness tests This Appendix contains additional empirical results and robustness tests. B.1. Sharpe ratios of beta-sorted portfolios Fig. B1 plots the Sharpe

More information

Practice Set #4 and Solutions.

Practice Set #4 and Solutions. FIN-469 Investments Analysis Professor Michel A. Robe Practice Set #4 and Solutions. What to do with this practice set? To help students prepare for the assignment and the exams, practice sets with solutions

More information

Chapter 11, Risk and Return

Chapter 11, Risk and Return Chapter 11, Risk and Return 1. A portfolio is. A) a group of assets, such as stocks and bonds, held as a collective unit by an investor B) the expected return on a risky asset C) the expected return on

More information

Stock Returns and Equity Premium Evidence Using Dividend Price Ratios and Dividend Yields in Malaysia

Stock Returns and Equity Premium Evidence Using Dividend Price Ratios and Dividend Yields in Malaysia Stock Returns and Equity Premium Evidence Using Dividend Price Ratios and Dividend Yields in Malaysia By David E. Allen 1 and Imbarine Bujang 1 1 School of Accounting, Finance and Economics, Edith Cowan

More information

Discussion: In Search of Distress Risk and Default Risk, Shareholder Advantage, and Stock Returns

Discussion: In Search of Distress Risk and Default Risk, Shareholder Advantage, and Stock Returns Discussion: In Search of Distress Risk and Default Risk, Shareholder Advantage, and Stock Returns Kent D. Daniel 1 1 Goldman Sachs Asset Management and Kellogg, Northwestern NYU/Moody s Credit Conference,

More information

Volatility Managed Portfolios

Volatility Managed Portfolios Volatility Managed Portfolios Alan Moreira and Tyler Muir November 23, 2015 Abstract Managed portfolios that take less risk when volatility is high produce large, positive alphas and increase factor Sharpe

More information

Asian Economic and Financial Review THE CAPITAL INVESTMENT INCREASES AND STOCK RETURNS

Asian Economic and Financial Review THE CAPITAL INVESTMENT INCREASES AND STOCK RETURNS Asian Economic and Financial Review journal homepage: http://www.aessweb.com/journals/5002 THE CAPITAL INVESTMENT INCREASES AND STOCK RETURNS Jung Fang Liu 1 --- Nicholas Rueilin Lee 2 * --- Yih-Bey Lin

More information

Models of Risk and Return

Models of Risk and Return Models of Risk and Return Aswath Damodaran Aswath Damodaran 1 First Principles Invest in projects that yield a return greater than the minimum acceptable hurdle rate. The hurdle rate should be higher for

More information

The capital asset pricing model (CAPM) of William Sharpe (1964) and John

The capital asset pricing model (CAPM) of William Sharpe (1964) and John Journal of Economic Perspectives Volume 18, Number 3 Summer 2004 Pages 25 46 The Capital Asset Pricing Model: Theory and Evidence Eugene F. Fama and Kenneth R. French The capital asset pricing model (CAPM)

More information

How Many Days Equal A Year? Non-trivial on the Mean-Variance Model

How Many Days Equal A Year? Non-trivial on the Mean-Variance Model How Many Days Equal A Year? Non-trivial on the Mean-Variance Model George L. Ye, Dr. Sobey School of Business Saint Mary s University Halifax, Nova Scotia, Canada Christine Panasian, Dr. Sobey School of

More information

SAMPLE MID-TERM QUESTIONS

SAMPLE MID-TERM QUESTIONS SAMPLE MID-TERM QUESTIONS William L. Silber HOW TO PREPARE FOR THE MID- TERM: 1. Study in a group 2. Review the concept questions in the Before and After book 3. When you review the questions listed below,

More information

WEATHERSTORM FORENSIC ACCOUNTING LONG-SHORT INDEX. External Index Methodology Document

WEATHERSTORM FORENSIC ACCOUNTING LONG-SHORT INDEX. External Index Methodology Document WEATHERSTORM FORENSIC ACCOUNTING LONG-SHORT INDEX External Index Methodology Document 6/18/2015 CONTENTS 1 Index Overview... 2 2 Index Construction Methodology... 2 2.1 Index Constitution... 2 2.2 Universe

More information

Intermediary Balance Sheets

Intermediary Balance Sheets Federal Reserve Bank of New York Staff Reports Intermediary Balance Sheets Tobias Adrian Nina Boyarchenko Staff Report No. 65 November 3 This paper presents preliminary findings and is being distributed

More information

MVO has Eaten my Alpha

MVO has Eaten my Alpha Dear Investor: MVO has Eaten my Alpha Sebastian Ceria, CEO Axioma, Inc. January 28 th, 2013 Columbia University Copyright 2013 Axioma The Mean Variance Optimization Model Expected Return - Alpha Holdings

More information

Online Appendix for Demand for Crash Insurance, Intermediary Constraints, and Risk Premia in Financial Markets

Online Appendix for Demand for Crash Insurance, Intermediary Constraints, and Risk Premia in Financial Markets Online Appendix for Demand for Crash Insurance, Intermediary Constraints, and Risk Premia in Financial Markets Hui Chen Scott Joslin Sophie Ni August 3, 2015 1 An Extension of the Dynamic Model Our model

More information

Asymmetric Volatility and the Cross-Section of Returns: Is Implied Market Volatility a Risk Factor?

Asymmetric Volatility and the Cross-Section of Returns: Is Implied Market Volatility a Risk Factor? Asymmetric Volatility and the Cross-Section of Returns: Is Implied Market Volatility a Risk Factor? R. Jared Delisle James S. Doran David R. Peterson Florida State University Draft: June 6, 2009 Acknowledgements:

More information

ANALYSIS AND MANAGEMENT

ANALYSIS AND MANAGEMENT ANALYSIS AND MANAGEMENT T H 1RD CANADIAN EDITION W. SEAN CLEARY Queen's University CHARLES P. JONES North Carolina State University JOHN WILEY & SONS CANADA, LTD. CONTENTS PART ONE Background CHAPTER 1

More information

Stock Market -Trading and market participants

Stock Market -Trading and market participants Stock Market -Trading and market participants Ruichang LU ( 卢 瑞 昌 ) Department of Finance Guanghua School of Management Peking University Overview Trading Stock Understand trading order Trading cost Margin

More information

Rethinking Fixed Income

Rethinking Fixed Income Rethinking Fixed Income Challenging Conventional Wisdom May 2013 Risk. Reinsurance. Human Resources. Rethinking Fixed Income: Challenging Conventional Wisdom With US Treasury interest rates at, or near,

More information

Black Scholes Merton Approach To Modelling Financial Derivatives Prices Tomas Sinkariovas 0802869. Words: 3441

Black Scholes Merton Approach To Modelling Financial Derivatives Prices Tomas Sinkariovas 0802869. Words: 3441 Black Scholes Merton Approach To Modelling Financial Derivatives Prices Tomas Sinkariovas 0802869 Words: 3441 1 1. Introduction In this paper I present Black, Scholes (1973) and Merton (1973) (BSM) general

More information

FADE THE GAP: ODDS FAVOR MEAN REVERSION

FADE THE GAP: ODDS FAVOR MEAN REVERSION FADE THE GAP: ODDS FAVOR MEAN REVERSION First Draft: July 2014 This Draft: July 2014 Jia-Yuh Chen and Timothy L. Palmer Abstract When a stock opens a day s trading at a lower price than its previous day

More information

Chapter 11. Topics Covered. Chapter 11 Objectives. Risk, Return, and Capital Budgeting

Chapter 11. Topics Covered. Chapter 11 Objectives. Risk, Return, and Capital Budgeting Chapter 11 Risk, Return, and Capital Budgeting Topics Covered Measuring Market Risk Portfolio Betas Risk and Return CAPM and Expected Return Security Market Line CAPM and Stock Valuation Chapter 11 Objectives

More information

CHAPTER 9: THE CAPITAL ASSET PRICING MODEL

CHAPTER 9: THE CAPITAL ASSET PRICING MODEL CHAPTER 9: THE CAPITAL ASSET PRICING MODEL PROBLEM SETS 1. E(r P ) = r f + β P [E(r M ) r f ] 18 = 6 + β P(14 6) β P = 12/8 = 1.5 2. If the security s correlation coefficient with the market portfolio

More information

Cash Holdings and Mutual Fund Performance. Online Appendix

Cash Holdings and Mutual Fund Performance. Online Appendix Cash Holdings and Mutual Fund Performance Online Appendix Mikhail Simutin Abstract This online appendix shows robustness to alternative definitions of abnormal cash holdings, studies the relation between

More information

Downside market risk of carry trades

Downside market risk of carry trades Downside market risk of carry trades Victoria Dobrynskaya 1 First version: March 2010 This version: March 2013 Abstract Carry trades consistently generate high excess returns with high Sharpe ratios. I

More information

EVALUATION OF THE PAIRS TRADING STRATEGY IN THE CANADIAN MARKET

EVALUATION OF THE PAIRS TRADING STRATEGY IN THE CANADIAN MARKET EVALUATION OF THE PAIRS TRADING STRATEGY IN THE CANADIAN MARKET By Doris Siy-Yap PROJECT SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER IN BUSINESS ADMINISTRATION Approval

More information

THE CAPITAL ASSET PRICING MODEL VERSUS THE THREE FACTOR MODEL: A United Kingdom Perspective

THE CAPITAL ASSET PRICING MODEL VERSUS THE THREE FACTOR MODEL: A United Kingdom Perspective P a g e 1 THE CAPITAL ASSET PRICING MODEL VERSUS THE THREE FACTOR MODEL: A United Kingdom Perspective Chandra Shekhar Bhatnagar Department of Social Sciences, The University of the West Indies, Trinidad

More information

Why are Some Diversified U.S. Equity Funds Less Diversified Than Others? A Study on the Industry Concentration of Mutual Funds

Why are Some Diversified U.S. Equity Funds Less Diversified Than Others? A Study on the Industry Concentration of Mutual Funds Why are Some Diversified U.S. Equity unds Less Diversified Than Others? A Study on the Industry Concentration of Mutual unds Binying Liu Advisor: Matthew C. Harding Department of Economics Stanford University

More information

Models of Asset Pricing The implications for asset allocation

Models of Asset Pricing The implications for asset allocation Models of Asset Pricing The implications for asset allocation 2004 Finance & Investment Conference 28 June 2004 Tim Giles CHARLES RIVER ASSOCIATES Vice President CRA London CRA 2004 Agenda New orthodoxy

More information

Facts and Fantasies About Factor Investing

Facts and Fantasies About Factor Investing Zélia Cazalet Quantitative Research Lyxor Asset Management, Paris zelia.cazalet@lyxor.com Thierry Roncalli Quantitative Research Lyxor Asset Management, Paris thierry.roncalli@lyxor.com October 2014 Abstract

More information

Asset Pricing of Financial Institutions: The Cross-Section of Expected Stock Returns in the Property/Liability Insurance Industry

Asset Pricing of Financial Institutions: The Cross-Section of Expected Stock Returns in the Property/Liability Insurance Industry Asset Pricing of Financial Institutions: The Cross-Section of Expected Stock Returns in the Property/Liability Insurance Industry Semir Ben Ammar a, Martin Eling a, and Andreas Milidonis b This version:

More information

Illiquidity frictions and asset pricing anomalies

Illiquidity frictions and asset pricing anomalies Illiquidity frictions and asset pricing anomalies Björn Hagströmer a, Björn Hansson b, Birger Nilsson,b a Stockholm University, School of Business, S-10691 Stockholm, Sweden b Department of Economics and

More information

W ORKING PAPERS SES. A Note on the Impact of Portfolio Overlapping in Tests of the Fama and French Three-Factor Model 11.

W ORKING PAPERS SES. A Note on the Impact of Portfolio Overlapping in Tests of the Fama and French Three-Factor Model 11. 11.2012 N 433 W ORKING PAPERS SES A Note on the Impact of Portfolio Overlapping in Tests of the Fama and French Three-Factor Model Martin Wallmeier and Kathrin Tauscher F ACULTÉ DES SCIENCES ECONOMIQUES

More information