Using the cross section of stock returns also allows us to easily control for a battery of cross sectional effects, like the size and value factors of fama and french 1993, the momentum effect of jegadeesh and titman 1993, and the effect of liquidity risk documented by pastor and stambaugh 2003. Crosssection of expected returns and extreme returns. Forecast dispersion and the crosssection of expected returns. The conditional capm and the crosssection of expected returns. First, using the cross section of returns allows us to create a useful hedging, or mimicking factor portfolio for aggregate volatility risk. The conditional capm and the crosssection of expected returns 5 business cycle. The crosssection of expected returns in the secondary. Hundreds of papers and factors attempt to explain the crosssection of expected returns. While our focus is on the crosssection of equity returns.
Bs the slope in the regression of a securitys return on the markets return, and b market bs suffice to describe the crosssection of expected returns. Given this extensive data mining, it does not make sense to use the usual criteria for establishing. Many option studies have estimated a negative price of risk for market. What is cross section in cross section of stock return.
The cross section of cashflow volatility and expected. The crosssection of volatility and expected returns rice university. December 2007 abstract i study the crosssection of expected returns in a general equilibrium framework in which agents form habits over individual varieties of goods as opposed to over a composite. Also, to the extent that the business cycle is induced. Thus, they conclude that beta is neither a single relevant risk measure nor a. The crosssection of expected stock returns 429 also possible, however, that beme just captures the unraveling regression toward the mean of irrational market whims about the prospects of firms. Eisfeldt and dimitris papanikolaou abstract organization capital is a production factor that is embodied in the rms key talent and has an e ciency that is rm speci c. Apt or factor model indicates that aggregate volatility should also be priced in the crosssection of.
The cross section of expected returns in the secondary corporate loan market mehdi beyhaghiy sina ehsaniz june 1, 2015 abstract we examine the pricing of characteristics and betas in the cross section of expected corporate loan returns. Forecast dispersion and the crosssection of expected returns timothy c. Abstract we construct a dynamic general equilibrium production economy to explicitly link expected stock returns to. Section iv analyzes the properties of the leverage mimicking portfolio and forms portfolios sorted on leverage betas. The role of investor attention and risk preferences. Outofsample forecasts from fm regressions provide a simple, yet surprisingly effective, way to form a composite trading strategy going long high expected return stocks.
We want to both determine whether the volatility of the market is a priced risk factor and estimate the price of aggregate volatility risk. Crash sensitivity and the crosssection of expected stock. This paper provides new evidence on the crosssectional properties of expected stock returns, focusing on two closely related questions that, to date, do not have. Crash aversion and the crosssection of expected stock. The crosssection of expected stock returns 3 available at the time i. A new factor model consisting of the market factor, an investment factor, and a return onequity factor is a good start to understanding the crosssection of expected stock returns. What are the key factors explaining crosssectional variation in. Equilibrium crosssection of returns joao gomes university of pennsylvania leonid kogan massachusetts institute of technology lu zhang university of rochester. Financial intermediaries and the crosssection of asset returns. Subrahmanyam journal of financial economics, 49 september 1998 345373 we very much regret that owing to a programming oversight, in part driven by the fact.
Also related to our study is the recent line of literature which has begun to study the prices and risk premiums of the term structure of dividend strips e. Competition, productivity, organization and the cross section of expectedreturns robertnovymarxz universityof chicago and nber this draft. Our findings indicate that in the greek stock market there is not a positive relation between risk, measured by. School of accounting and finance, and center for advanced studies in finance, university of waterloo, waterloo, canada on n2l 3g1. We predict that booktomarket strategies work because the retained earnings component of the book value of equity includes the accumulation and, hence, the averaging of past earnings.
Consumption risk and the cross section of expected returns. The crosssection of expected returns in the secondary corporate loan market internet appendix 1bivariate portfolio sorts we examine whether the spread in average returns between momentum portfolios can be explained by other loan characteristics. Alternative factor specifications, security characteristics, and the crosssection of expected stock returns. Consumption risk and the cross section of expected returns jonathan a. Seasonality in the crosssection of stock returns steven l. The six measures of expectations are highly positively. Market frictions, price delay, and the crosssection of. The cross section of cashflow volatility and expected stock. Worldwide, stocks with strong crash sensitivity deliver average returns of more than. Market frictions, price delay, and the crosssection of expected returns abstract we parsimoniously characterize the severity of market frictions a.
So intuitively, if you study the cross section of stock returns. Stocks with relatively high low returns tend to have high low returns every year in the same calendar month. We provide a systematic study of how stochastic volatility is priced in the crosssection of expected stock returns. Forecast dispersion and the cross section of expected returns timothy c. We extend and enrich the finding of a recent paper by bali, cakici, and whitelaw. Crosssection of volatility and expected returns 261 of assets that may have different exposures to aggregate volatility and hence different average returns. Ep is likely to be higher prices are lower relative to earnings for stocks with higher risks and expected returns, whatever the unnamed sources of risk. The crosssection of expected stock returns eugene f. If the volatility of the market return is a systematic risk. T1 the conditional capm and the crosssection of expected returns. Financial intermediaries and the crosssection of asset.
Among them are levy 1978, merton 1987, and malkiel and xu 2002. Crash sensitivity and the cross section of expected stock returns abstract this paper examines whether investors receive compensation for holding crashsensitive stocks. Crash sensitivity and the crosssection of expected stock returns abstract this paper examines whether investors receive compensation for holding crashsensitive stocks. Competition, productivity, organization and the cross. Cross section of volatility and expected returns 261 of assets that may have different exposures to aggregate volatility and hence different average returns. The first goal of this paper is to provide a systematic investigation of how the stochastic volatility of the market is priced in the cross. Parker princeton university and national bureau of economic research christian julliard princeton university this paper evaluates the central insight of the consumption capital asset pricing model that an assets expected return is determined by its equilibrium risk to. Using a stock measure of organization capital based on readily available ac. The conditional capm and the crosssectionof expected returns ravi jagannathan and zhenyuwang abstract most empirical studies of the static capm assume that betas remain constant over time and that the return on the valueweighted portfolio of all stocks is a proxy for the return on aggregate wealth. We perform dependent and independent bivariate portfolio sorts. Expectations of returns and expected returns robin greenwood harvard business school andrei shleifer harvard university we analyze time series of investor expectations of future stock market returns from six data sources between 1963 and 2011. Earnings, retained earnings, and booktomarket in the cross section of expected returns. Ross school of business university of michigan shrihari santosh booth school of business university of chicago ross school of business working paper working paper no. While our focus is on the crosssection of equity returns, our message applies to many different areas of finance.
Whatever the underlying economic causes, our main result is straightfor ward. Given that so many papers have attempted to explain the same crosssection of expected returns, statistical inference should not be based on a single test perspective. Organization capital and the crosssection of expected returns andrea l. Outofsample forecasts from fm regressions provide a simple, yet surprisingly effective, way to form a composite trading strategy going long highexpectedreturn stocks. Crash sensitivity and the crosssection of expected stock returns. Second, the ratio of booktomarket equity and size are found to be the most significant variables that can account for the crosssection of expected stock returns. Section ii describes the data and empirical strategy, section iii conducts a number of asset pricing tests in the crosssection of stock and bond returns. Underdiversified investors demand a return compensation for bearing idiosyncratic risk. Most empirical studies of the static capm assume that betas remain constant over time and that the return on the valueweighted portfolio of all stocks is a proxy for the return on aggregate wealth. Hence, both shareholders and key talent have a claim to its cash ows. O3s the slope in the regression of a securitys return on the markets return, and b market o3s suffice to describe the crosssection of expected returns. We want to determine if the volatility of the market is a priced risk factor and estimate the price of aggregate volatility risk.
First, we crosssectionally estimate a price of risk for aggregate market volatility. N2 most empirical studies of the static capm assume that betas remain constant over time and that the return on the valueweighted portfolio of all stocks is a proxy for the return on aggregate wealth. Information quality and the crosssection of expected returns. The conditional capm and the cross sectionof expected returns ravi jagannathan and zhenyuwang abstract most empirical studies of the static capm assume that betas remain constant over time and that the return on the valueweighted portfolio of all stocks is a proxy for the return on aggregate wealth. The cross section of expected holding period returns and. The authors thank ariel zucker and daniel green for outstanding research assistance. How average returns change across different stock or portfolios.
But a recent paper by ang, hodrick, xing, and zhang 2006, ahxz hereafter finds that, in the crosssection of. Deep habits and the crosssection of expected returns. Competition, productivity, organization and the cross section. Retained earningstomarket predicts the cross section of average returns in u. Given this extensive data mining, it does not make any economic or statistical sense to use the usual significance criteria for a newly discovered factor, e. Ahern abstract industries that are more central in the network of intersectoral trade earn higher stock returns than industries that are less central. Cross section of expected returns and extreme returns. Funding liquidity and the cross section of stock returns adrian and etula, 2010 and intermediary leverage and the crosssection of expected returns muir, 2010. Singapore management university institutional knowledge at.
Ball 1978 argues that ep is a catchall proxy for unnamed factors in expected returns. However, since that time, hundreds of papers have tried to explain the cross. Echoing a recent disturbing conclusion in the medical literature, we argue that most claimed research findings in. But a recent paper by ang, hodrick, xing, and zhang 2006, ahxz hereafter finds that, in the cross section of. However, since that time, hundreds of papers have tried to explain the crosssection of expected returns. June, 2009 abstract this paper studies a model of industry oligopoly, in which. I am grateful to christopher malloy and andrew jackson for thoughtful comments and suggestions.
Out of sample forecasts from fm regressions provide a simple, yet surprisingly effective, way to form a composite trading strategy going long high expected return stocks. Asset pricing program hundreds of papers and hundreds of factors attempt to explain the crosssection of expected returns. T1 the conditional capm and the cross section of expected returns. Apt or factor model indicates that aggregate volatility should also be priced in the cross section of. Portfolio inefficiency and the cross section of expected returns abstract the capital asset pricing model implies that i the market portfolio is efficient and ii expected returns are linearly related to betas. The conditional capm and the cross section of expected returns 5 business cycle. The cross section of expected stock returns 429 also possible, however, that beme just captures the unraveling regression toward the mean of irrational market whims about the prospects of firms. October 2006 abstract this paper presents a new pattern in the crosssection of expected stock returns. Luck versus skill in the crosssection of mutual fund returns. Organization capital and the crosssection of expected returns. The crosssection of volatility and expected returns.
If the volatility of the market return is a systematic risk factor, an. Linking crosssectional and aggregate expected returns. Given this extensive data mining, it does not make any economic or statistical sense to. Harvey, yan liu, and heqing zhu, and it is a startler though perhaps not a surprise. There are several advantages of using a cross section of returns on stocks, rather than a cross section of options on the market, to estimate the price of risk of aggregate volatility. The cross section of expected stock returns tuck school of. Thus, they conclude that beta is neither a single relevant risk measure nor a subset of. Portfolio inefficiency and the crosssection of expected. The conditional capm and the crosssection of expected. Which characteristics provide incremental information for expected returns. Hundreds of papers and hundreds of factors attempt to explain the cross section of expected returns.
What are the key factors explaining crosssectional variation in expected returns. During a recession, for example, financial leverage of firms in relatively poor shape may increase sharply relative to other firms, causing their stock betas to rise. There are several empirical contradictions of the sharpelintnerblack slb model. If aggregate volatility is a risk factor that is orthogonal to existing risk factors, the sensitivity of stocks. Studies in this literature begin with the observation that expected excess returns in the crosssection are a function of a set of characteristics. Organization capital and the cross section of expected returns andrea l.
Eisfeldty northwestern university dimitris papanikolaouz northwestern university september 2009 abstract this paper studies the unique risk characteristics of organization capital. Oct 20, 2014 there is a new nber paper by campbell r. Throughout the paper, our emphasis is on whether stocks expected returns are driven by their sensitivity to dispersion, after accounting for a large set of other. We then derive implications for the crosssection of expected returns, and provide empiricalsupport for these predictions. Equilibrium crosssection of returns wharton finance. Many do not view these implications as separate, since either implies the other, but we. We capture the crash sensitivity of stocks by their lower tail dependence ltd with the market based on copulas. Eisfeldt northwestern university dimitris papanikolaouy northwestern university november 2008 abstract this paper studies the unique risk characteristics of organization capital. Throughout the paper, our emphasis is on whether stocks expected returns are driven by their sensitivity to dispersion, after accounting for a large set of other systematic factors and stocks idiosyncratic characteristics. The cross section of expected stock returns 3 available at the time i. Hundreds of papers and hundreds of factors attempt to explain the crosssection of expected returns. Crash aversion and the crosssection of expected stock returns worldwide abstract this paper examines whether investors receive compensation for holding stocks with a strong sensitivity to extreme market downturns in a sample covering forty countries. Our goal is to provide guidance as to the appropriate significance level using a multiple testing framework. Two easily measured variables, size me and booktomarket equity.
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