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Asset Pricing

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Asset pricing is a field of finance that studies how assets are valued in financial markets. It involves the analysis of the relationship between risk and expected return, utilizing models to determine the fair value of securities based on their inherent risk factors and market conditions.
lightbulbAbout this topic
Asset pricing is a field of finance that studies how assets are valued in financial markets. It involves the analysis of the relationship between risk and expected return, utilizing models to determine the fair value of securities based on their inherent risk factors and market conditions.

Key research themes

1. How do multifactor extensions to the Capital Asset Pricing Model improve empirical asset return explanations?

This theme investigates the progression from the traditional single-factor CAPM to more complex multifactor models that incorporate additional risk factors such as size, value, profitability, investment, momentum, and human capital. Research in this area focuses on improving the explanatory power of asset pricing models for cross-sectional variations in stock returns and addressing empirical anomalies that the CAPM fails to explain. These multifactor models are critically tested across different markets, including emerging economies, using rigorous econometric methodologies such as Fama-MacBeth regressions and GMM estimations.

Key finding: Fama and French (2015) extended their three-factor model by adding profitability and investment factors to better capture patterns in average stock returns, improving the model's descriptive power for cross-sectional returns.... Read more
Key finding: The authors introduce human capital as a sixth factor augmenting Fama and French's five-factor model and find that it shares significant predictive power alongside traditional factors. Using robust IVGMM estimation across... Read more
Key finding: This paper empirically tests CAPM and multifactor models, including extensions with human capital factors, in the context of the Pakistani stock market using data on 173 non-financial firms. The research finds that the human... Read more
Key finding: Focusing on the Brazilian stock market from 2010 to 2023, this study constructs thirty-two portfolios sorted on five characteristics including labor income growth as a proxy for human capital. It empirically supports the... Read more

2. What are the theoretical and empirical critiques of the CAPM and how have alternative approaches like Arbitrage Pricing Theory and arbitrage-based asset pricing addressed its limitations?

This theme revolves around the foundational critiques of the Capital Asset Pricing Model (CAPM), both empirical and theoretical, and alternative asset pricing theories that emerge to address identified shortcomings. It emphasizes the Arbitrage Pricing Theory (APT), Ross's arbitrage model, and critiques regarding market rationality, equilibrium assumptions, and empirical failings. The research under this theme also explores how these alternative frameworks potentially offer more general and robust explanations for asset returns and risk measurement without relying on restrictive CAPM assumptions.

Key finding: Ross develops the arbitrage pricing theory as a rigorous alternative to the mean-variance CAPM, circumventing restrictive normality and quadratic preference assumptions. His arbitrage model posits that asset returns can be... Read more
Key finding: This comprehensive review critiques CAPM's empirical failures despite its widespread theoretical appeal and practical use. It underscores issues with testing the model, such as market portfolio specification and risk... Read more
Key finding: The authors critically trace CAPM's role as a central paradigm of market rationality and highlight how accumulating empirical anomalies have rendered the model inadequate for explaining real market behavior. They discuss how... Read more
Key finding: This literature review systematically presents CAPM's theoretical development and the subsequent empirical challenges. It confirms that while CAPM provides a normative framework linking risk and expected return via beta, its... Read more

3. How does the incorporation of Environmental, Social, and Governance (ESG) factors influence asset pricing and price discovery processes in financial markets?

This research theme examines the evolving integration of ESG criteria into asset pricing models and market price discovery, focusing on empirical evidence that ESG factors affect expected returns, risk premia, and dynamics of spot and futures markets. Studies apply methodologies such as Generalized Method of Moments (GMM) and time-series causality testing to dissect the role of ESG scores, disclosures, and adjustments in influencing asset prices across sectors and economies. This area is critical as sustainable investing gains momentum and ESG considerations increasingly influence investors' risk-return tradeoffs.

Key finding: Analyzing Chinese listed firms from 2019 to 2023, this study finds a significant negative association between ESG scores and excess returns, suggesting that higher ESG ratings command lower risk-adjusted returns consistent... Read more
Key finding: This study employs time-series methodologies to assess the role of ESG disclosure scores on the price discovery mechanism of Indian energy sector firms. While most firms show no significant impact of ESG on price discovery or... Read more

All papers in Asset Pricing

Questo lavoro si propone di offrire agli operatori una metodologia per la scelta di prezzi e quantità nelle aste dei titoli di Stato, in particolare in quelle dei Buoni Ordinari del Tesoro (BOT). Analogamente a quanto viene suggerito... more
In questo lavoro viene analizzato il problema della determinazione delle commissioni di sottoscrizione (standby underwriting fees) all’interno dello schema offerto dalla teoria di valutazione delle opzioni. Le istituzioni finanziarie che... more
Despite the strong growing popularity of Asset Pricing Models, it is difficult to estimate which factor contributes significantly in explaining average excess portfolio returns particularly in emerging equity market. Using an extensive... more
Given different views on the practicality of the multi-factor models in the Chinese stock market, this paper combines this very advanced pricing model with the newly established Chinese board, aiming to explore a pricing model applicable... more
Given different views on the practicality of the multi-factor models in the Chinese stock market, this paper combines this very advanced pricing model with the newly established Chinese board, aiming to explore a pricing model applicable... more
A two-period (0 and T) Arrow^Debreu economy is set up with a general model of uncertainty. We suppose that an equilibrium exists for this economy. The Arrow-Debreu economy is placed in a Radner [31] setting; agents may trade claims... more
A new scientific truth does not best gain acceptance by convincing and instructing its opponents, but much more so in that its opponents gradually die out and the upcoming generation is entrusted with the truth from the beginning.
This paper deals with an analytical framework to provide a measure of overall performance which involves both socioeconomic activities and environmental sustainability using a recent Index of well-being. The composite indicator, created... more
We especially thank our discussant Thomas Langer for his helpful comments. Financial support under a NWO-Pionier grant is gratefully acknowledged
We present results on expectation formation in a controlled experimental environment. In each period subjects are asked to predict the next price of a risky asset. The realized market price is derived from an unknown market equilibrium... more
Portfolio selection is among the most challenging processes that have recently increased the interest of professionals in the area. The goal of mean-variance portfolio selection is to maximize expected return with minimizing risk. The... more
We use portfolio holdings to show that mutual funds preferentially trade stocks according to the stocks" sentiment betas. Stocks with high sentiment betas are more responsive to investor sentiment and increase (decrease) in value as... more
This work presents a class of models in asset pricing, whose underlying has dynamics of Affine jump diffusion type. We first present Lévy processes with their properties. We then introduce Affine jump diffusion processes which are... more
Over the past decade, multifactor models have shown enhanced capability compared to single-factor models in explaining asset return variability. Given the common assertion that higher risk tends to yield higher returns, this study... more
We study the permit price volatility-trading activity link in the EU ETS Phase I. We focus on the contrasting roles of different market players. We show that the relation was overall positive, mainly due to energy providers. Many other... more
Purpose- The prime objective of this study was to find the co-movement between the Canadian credit default swaps market, the Stock market and volatility index (TSX 60 Index) Design/ Methodology- To achieve this purpose, daily data... more
Put option is a contract to sell some underlying assets in the future with a certain price. On European put options, selling only can be exercised at maturity date. Behavior of European put options price can be modeled by using the... more
1. Канд. эконом. наук, преподаватель кафедры экономики и финансов фирмы Ниу ВшЭ, директор в инвестиционной компании nhcapital. 1. . 2. по данным информационной системы Google Finance по индексу s&P500 с 25.
We find that firms experiencing improvements in crowdsourced employer ratings significantly outperform firms with declines. The return effect is concentrated among reviews from current employees, stronger among early firm reviews, and... more
Problem/Relevance: Measuring the risk of an asset and the economic forces driving the price of the risk is a challengingtask that preoccupied the asset pricing literature for decades. However, there exists no consensus on the integrated... more
We study the international stock returns across Europe, Asia Pacific, North America, US, Japan, Global, and Global excluding US. We find there are value premiums in average stock returns across the regions. There is momentum return in all... more
The present study introduce the human capital component to the Fama and French five-factor model proposing an equilibrium six-factor asset pricing model. The study employs an aggregate of four sets of portfolios mimicking size and... more
HAL is a multi-disciplinary open access archive for the deposit and dissemination of scientific research documents, whether they are published or not. The documents may come from teaching and research institutions in France or abroad, or... more
PurposeThe purpose of the study is to examine the dynamics in the troika of asset pricing, volatility, and the business cycle in the US and Japan.Design/methodology/approachThe study uses a six-factor asset pricing model to derive the... more
This paper investigates the impact of Environmental, Social, and Governance (ESG) factors on asset pricing using a Generalized Method of Moments (GMM) estimation framework. The study aims to determine whether ESG scores are priced in... more
This paper examines one type of calendar effect in financial markets, seasonal variation in the return on stocks. The effect analyzed is referred to as the Halloween Effect or Sell in May and Go Away. This refers to the finding that stock... more
What determined the value of South African assets after the unbanning of the African National Congress (ANC) and the release of Nelson Mandela? Economic or political events? This paper employs a dynamic version of the APT model for the... more
Purpose-Financial agents pay a great attention to the relationship between credit default swaps (CDS) and other financial assets. Being considered as a financial asset and then as a possible component of a portfolio, CDS's relationship... more
In this article, the author defends the idea that one of the positive results of modern economic analysis is the conviction that there is no natural law in economics. Thus, the most thorough scientific research which has tried to provide... more
High levels of volatility, which reflect fluctuations in the price of a financial asset or instrument, lead investors to monitor global markets more closely. The VIX index, closely followed by global investors, signals expectations of... more
Some risky activities are optional, for example motoring. Participation in them is most attractive for good risks, creating a tendency for advantageous selection in the associated insurance market. Taxing insurance consequently yields e¢... more
We consider a general GMM framework where weaker patterns of identi cation may arise: typically, the data generating process is allowed to depend on the sample size. We are interested in providing inference about the identi cation of the... more
We study the asymptotic properties of the standard GMM estimator when additional moment restrictions, weaker than the original ones, are available. We provide conditions under which these additional weaker restrictions improve the... more
One of the main concerns of investors is the evaluation of the return on investment, which is conducted using various models such as the CAPM (single-factor model), Fama-French three/five-factor models, and Roy and Shijin’s six-factor... more
The classical Black-Scholes-Merton framework describes a world in which options can be replicated exactly by continuous trading in the underlying asset. Once a proportional transaction fee is levied on every trade, the theoretical... more
This study applies broad approach to analyse the impact of corporate tax avoidance on earnings manipulation in Nigeria. Added to that, the study also investigates whether earnings management plays any moderating role in the relationship... more
This study applies broad approach to analyse the impact of corporate tax avoidance on earnings manipulation in Nigeria. Added to that, the study also investigates whether earnings management plays any moderating role in the relationship... more
Investors face difficulties in spotting lucrative investment opportunities and determining whether to purchase or sell shares due to the securities market's extreme volatility. For investors, the performance of many industries adds even... more
This paper examines the volatility and performance of the U.S. stock market in light of ongoing debates about informational efficiency. By applying Monte Carlo simulations and regression models to the S&P 500 index, the analysis shows... more
Recent evidence suggests that all asset returns are predictable to some extent with excess returns on real estate relatively easier to forecast. This raises the issue of whether we can successfully exploit this level of predictability... more
Why do risk premia vary over time? We examine this problem theoretically and empirically by studying the effect of market belief on risk premia. Individual belief is taken as a fundamental, primitive, state variable. Market belief is... more
In dynamic stochastic general equilibrium (DSGE) models, the household's labor margin as well as consumption margin affects Arrow-Pratt risk aversion. This paper derives simple, closed-form expressions for risk aversion that take into... more
We investigate the effects of U.S. monetary policy on asset prices using a high-frequency event-study analysis. We test whether these effects are adequately captured by a single factor-changes in the federal funds rate target-and find... more
Recent legislation on Minimum Taxation (Pillar 2 and the GloBE Rules) and the BEFIT proposal from the EU Commission have brought attention to the differences in Effective Tax Rates (ETRs) across individual companies, corporate groups, and... more
Recent legislation on Minimum Taxation (Pillar 2 and the GloBE Rules) and the BEFIT proposal from the EU Commission have brought attention to the differences in Effective Tax Rates (ETRs) across individual companies, corporate groups, and... more
Dengan ini saya menyatakan dengan sesungguhnya bahwa dalam skripsi ini tidak terdapat keseluruhan atau sebagian tulisan orang lain yang saya ambil dengan cara menyalin dan meniru dalam rangkaian kalimat atau simbol yang menunjukkan... more
This study establishes a novel mathematical framework for stochastic maintenance optimization in production systems by integrating Markov decision processes (MDPs) with convex programming theory. We develop a Z-transformation-based... more
This paper studies the implications of limited information-processing capacity (also called "rational inattention") for asset pricing in a linear-quadratic permanent income model. It is shown that rational inattention lowers asset prices... more
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