Rf, is described by the sensitivities of its returns. Production based measures of risk for asset pricing, journal of monetary economics, elsevier, vol. Evaluating the specification errors of asset pricing models. Rather than using some inflation measure we subtract a benchmark asset. An overview of asset pricing models university of bath bath. The crosssection and time series of stock and bond returns. Sep 22, 2018 the empirical asset pricing literature focuses on some wellknown anomalies, such as size, book tomarket, individual stock momentum, asset growth, accruals, profitability, long run reversal, short run reversal, and net issuance, and aims to find systematic risk factors that help to explain the crosssectional return variation of the portfolios. Optimal investment, growth options, and security returns. The marginal rate of transformation implies a novel macrofactor asset pricing model that does a reasonable job explaining the cross section of stock returns with plausible parameter values. A production based model for the term structure, journal of financial economics, elsevier, vol. Schmidt department of economics university of chicago this version.
Mar 29, 2020 production based measures of risk for asset pricing, 2010, journal of monetary economics, 572, 146163. Pedersen, 2005 asset pricing with liquidity risk journal of financial economics, 77, 375410 this one estimates the four kinds of correlation of price with liquidity. If you havent taken finance before, at least really read ch1 of asset pricing carefully before class starts. An extensive reference section captures the current state of the field. Finally, in contrast to traditional assetpricing theory, investment growth, rather than consumption growth, helps forecast the betas of high beme and small. Securities, pricing, and risk management claus munk. Topics in asset pricing hebrew university of jerusalem. A crosssectional test of a productionbased asset pricing model. Using a simple consumptionbased asset pricing model that explains nearly twothirds of the variation in average. Mar 15, 2006 production based measures of risk for asset pricing. Productionbased measures of risk for asset pricing sciencedirect.
Berk, jonathan, richard green and vasant naik, 1999, optimal investment, growth options and security returns, the journal of finance 545, 11531607. Productionbased measures of risk for asset pricing a stochastic discount factor for asset returns is recovered from equilibrium marginal rates of transformation inferred from producers firstorder conditions. Our motivation for using rm characteristics as measures of risk exposure draws on the productionbased asset pricing literature, which suggests that characteristics related to the rms capital structure and production technology are related to return covariances with the stochastic discount factor. A stochastic discount factor for asset returns is recovered from equilibrium marginal rates of transformation inferred from producers firstorder conditions. Riskaverse consumers own shares of the firms, and discount future consumption streams with a stochastic discount factor dependent on the. Although the exact specification of the marginal rate of transformation in proposition 1 is new, its specification is closely related to other popular empirical macrofactor asset pricing models such as cochrane 1996 and li et. Supplementary material for productionbased measures of. Empirical asset pricing models download ebook pdf, epub. The marginal rate of transformation implies a novel macrofactor asset pricing model that does a reasonable job explaining the crosssectional variation in average stock returns with plausible parameter values. Capital asset pricing model to determine the equilibrium rate of return to insurers. Disaster risk and its implications for asset pricing. Asset pricing implications of labor market event risk lawrence d.
Firm characteristics, consumption risk, and firmlevel risk. Section 5 contains a simple asset pricing model that formalizes the connections between the bond risk premium, the value premium, and the macroeconomy. Both book and market returns have been used to estimate these risk measures, but. For the sake of brevity, i discuss only a subset of papers that are closely related to mine, beginning with tallarini 2000. The marginal rate of transformation implies a novel macrofactor asset pricing model that does a reasonable job explaining the crosssectional variation in average stock returns with plausible parameter. The factors are returns on physical investment, inferred from investment data via a production function. Cochrane, using production based asset pricing to explain the behavior of stock returns over the business cycle, nber working paper no. Capital heterogeneity, volatility risk, and the value premium. A simple consumptionbased asset pricing model and the cross. An introduction to the theory and methods of empirical asset pricing, integrating classical foundations with recent developments. An application to industry cost of capital is presented in section 5. Predictability and the term structure of risk week 1. Risk, returns, and multinational production the quarterly. Limitations of the capital asset pricing model capm.
Empirical asset pricing pdf download pdf book library. The marginal rate of transformation implies a novel macrofactor asset pricing model. This section explains the productionbased approach to asset pricing and presents the. This thesis consists of three essays on empirical asset pricing around three themes. Equation 1 implies that a novel macrofactor asset pricing model follows from a productionbased asset pricing setup. Pdf productionbased measures of risk for asset pricing. Pdf productionbased measures of risk for asset pricing frederico belo academia. June 20 abstract this paper proposes statedependent, idiosyncratic tail risk as a key driver of asset prices. Productionbased measures of risk for asset pricing. Productionbased measures of risk for asset pricing 2010. A production based asset pricing model supports the existence of a homogeneous correlation among stocks with similar growth characteristics, depending on the prevailing idiosyncratic firm variance, increasing in the value of growth options and, hence, is connected to the value premium. The theory assumes people live two days, a convenient but obviously, er, simplified motive for trade. Evaluating alternative methods of asset pricing based on the overall magnitude of pricing errors, finance research letters, elsevier, vol.
Productionbased measures of risk for asset pricing core. News shocks and the productionbased term structure of equity. Productionbased measures of risk for asset pricing by. A productionbased asset pricing model with aggregate and idiosyncratic shocks accounts for most of these stylized facts.
Previous researchers have estimated underwriting betas for application within the. The focus is empirical, emphasizing how the models relate to the data. If unfavorable redistributions become more likely when productivity is low andor uncertainty is high e. As mentioned above, the capital asset pricing model capm laid the basis for modeling the riskreturn relationship as it is considered the basic theory that links risk and return for all assets. Productionbased measures of risk for asset pricing article in journal of monetary economics 572. Belo, federico, 2009, productionbased measures of risk for asset pricing, forthcoming, journal.
This logic led him to develop the implications of a production based asset pricing model in which covariances of asset returns with macroeconomic measures of investment are important risk factors. Theory and evidence article pdf available in journal of financial economics 862. This book gives an overview of the most widely used theories in asset pricing and some more. November 30, 2015 abstract we propose a novel approach to measuring rmlevel risk exposures and costs of equity. Production based asset pricing framework some numbers figure. In section 4, we document the robustness of our results to other test assets and estimation methods.
This paper is intended as a contribution to both the longrun risk literature and the literature regarding production based asset pricing. Even by using the arrowpratt measure of risk aversion, the utility function has. Firm characteristics, consumption risk, and firmlevel risk exposures robert f. My fields of interest include production based asset pricing, monetary economics, and the interaction of policy with financial markets. Other chapters cover production based asset pricing, longrun risk models, the campbellshiller approximation, the debate on covariance versus characteristics, and the relation of volatility to the crosssection of stock returns. Tallarini is the first to focus on an rbc model with recursive preferences. If the marginal rate of transformation is a valid stochastic discount factor. Department of accounting and finance, university of southern denmark, campusvej 55, dk5230 odense m.
Tail risk consumption based asset pricing models the discount factor representation of asset pricing models the equity premium puzzle the risk free rate puzzle the epsteinzin preferences long run risk habit formation prospect theory 3 professor doron avramov. This book offers a comprehensive advanced introduction to asset pricing, the study of models for the prices and returns of various securities. Collateral based asset pricing, 2015 meeting papers 293, society for economic dynamics. Finally, the empirical failure of the capm and the theoretical appeal of multifactor models led fama and french 1992, 1993, 1995, 1996 to develop a. Frederico belo, production based measures of risk for asset pricing, journal of monetary economics, 57, 2, 146, 2010. Section 4 presents an analysis of utilizing portfolio characteristics and risk exposures to capture rmlevel risk exposures. A pure productionbased asset pricing model wharton finance. In the asset pricing model of bansal and yaron 2004, an increase in aggregate volatility lowers asset prices and, importantly, shocks to volatility carry a separate risk premium. Jun 04, 2014 belo, federico, 2010, productionbased measures of risk for asset pricing, journal of monetary economics 572, 146163. The author examines a factor pricing model for stock returns. Productionbased asset pricing and the link between stock returns and economic. A growing literature in macroeconomics also highlights the e. This proposition shows that a macrofactor asset pricing model follows from a production based asset pricing setup.
These models endogenize consumption and cash ows and o er a deeper understanding of the links between stock prices and the real economy. Book versus market underwriting betas by cox, larry a. Section iii tests the productionbased model on the crosssection of expected stock returns of several portfolio sorts under two alternative empirical speci. Nielsen book data summary from the fields leading authority, the most authoritative and comprehensive advancedlevel textbook on asset pricing financial decisions and markets is a graduatelevel textbook that provides a broad overview of the field of asset pricing. Higher j implies greater covariance with market return.