Liquidity,Skewness and Stock Returns: Evidence from Chinese Stock Market

In this paper, a capital asset pricing model (CAPM) incorporating liquidity and skewness factors is proposed and tested by using the Chinese stock market data. The empirical results indicate that, under various market conditions, the liquidity-adjusted three-moment CAPM provides a better fit to the realized returns of various stock portfolios. Overall, this research reveals that illiquidity cost, liquidity risk and as well as skewness have important impacts on asset pricing in the Chinese stock market.     

On the Distributional Conditions for a Consumption-oriented Three Moment CAPM

In this paper, we develop sufficient conditions on probability distributions for a three moment (mean, variance, and skewness) consumption-oriented capital asset pricing model (CAPM) to price correctly a subset of assets. The assumptions that individuals in an allocationally efficient capital market have identical probability beliefs and monotone increasing strictly concave utility functions displaying nonincreasing absolute risk aversion imply an aggregate preference function that exhibits preference for expected return, aversion to variance of return, and preference for positive skewness. For otherwise arbitrary preferences, we show that quadratic characteristic lines are sufficient for a subset of assets to be priced according to a three moment consumption-oriented CAPM.     

The skewness risk premium in equilibrium and stock return predictability

In this study, we investigate the skewness risk premium in the financial market under a general equilibrium setting. Extending the long-run risks (LRR) model proposed by Bansal and Yaron (J Financ 59:1481–1509, 2004) by introducing a stochastic jump intensity for jumps in the LRR factor and the variance of consumption growth rate, we provide an explicit representation for the skewness risk premium, as well as the volatility risk premium, in equilibrium. On the basis of the representation for the skewness risk premium, we propose a possible reason for the empirical facts of time-varying and negative risk-neutral skewness. Moreover, we also provide an equity risk premium representation of a linear factor pricing model with the variance and skewness risk premiums. The empirical results imply that the skewness risk premium, as well as the variance risk premium, has superior predictive power for future aggregate stock market index returns, which are consistent with the theoretical implication derived by our model. Compared with the variance risk premium, the results show that the skewness risk premium plays an independent and essential role for predicting the market index returns.     

考虑流动性的三阶矩资本资产定价的理论模型与实证研究

本文把流动性风险、偏态风险引进传统CAPM模型中,推导出基于流动性的三阶矩资本资产定价的理论模型。本文的模型表明,证券(组合)的收益依赖于它的期望流动性成本、其流动性成本和市场流动性成本的协方差以及其收益和市场收益的协方差与协偏态。本文采用我国A股市场的股票收益数据对模型进行了实证检验.检验结果表明,我国A股市场的证券(组合)的风险溢价在大盘升降区间体现了不同的特征,无论是在全样本区间还是两个子样本区间,基于流动性的三阶矩资本资产定价模型都能更好的拟合资产收益,说明了流动性和偏态因素在我国A股市场的资产定价中有重要影响。     

MEAN GINI CAPITAL ASSET PRICING MODEL: SOME EMPIRICAL EVIDENCE

The capital asset pricing model of Sharpe (1964) and Lintner (1965) provides a valid approach to portfolio selection if either the distribution of asset returns is jointly normal or the investor's preference function is quadratic. Various authors have questioned the validity of these assumptions, and Roll (1977) raises the question whether the traditional CAPM can be tested. An alternative Capital Asset Pricing Model has been proposed by Shalit and Yitzhaki (1984). In this model the extended mean Gini coefficient is used to measure risk. As little research has been conducted on this model, this paper estimates systematic risk as derived from the extended mean Gini model for a sample of Australian companies and compares the empirical security market line with the predicted extended mean Gini security market line.     

A conditional regime switching CAPM

The standard Capital Asset Pricing Model (CAPM) is simple, intuitive, and grounded in sound economic theory. Yet, almost half a century's worth of empirical testing has so far failed to demonstrate its relevance. One major reason given for the CAPM's empirical failure is that beta is not the sole measure of systematic risk. In other words, the standard CAPM does not hold. Another important explanation is that the CAPM may hold conditionally rather than unconditionally. The standard CAPM fails to explain the cross-section of returns because it ignores the fact that both the risk and the price of risk are time-varying. The search for conditional models has led researchers to either disregard the theory behind the CAPM or to use statistical procedures that are too complex to be replicated by other researchers and practitioners. In this paper we propose a conditional model that is compatible with the standard CAPM while remaining simple and accessible to both researchers and practitioners. Beta and the risk premium are assumed to be time-varying, with the latter being associated with bull and bear states. We find strong support for the conditional CAPM with beta explaining both bull and bear markets. While the bear market ex-post risk premium is negative, the weighted average risk premium is positive and highly significant.     

中国股票市场流动性风险溢价研究

本文在对Fama三因素模型和LACAPM模型进行改进的基础上,实证研究了中国股票市场的流动性风险溢价、规模效应以及价值效应。实证结果发现,改进的FAMA三因素模型能够比CAPM更好地解释价值效应,但却不能解释规模效应和流动性风险溢价现象;而改进的LACAPM在解释市场异象上的有效性则明显优于其他定价模型。     

Conventional and downside CAPM: The case of London stock exchange

Many studies on asset pricing have highlighted the importance of downside risk, in line with the actual losses of investors. In addition, the capital asset pricing model (CAPM), although presented as a universal theory, may provide significantly different rates of return in bull and bear markets. Using the CAPM under different conditions could be regarded as an alternative measurement and valuation approach to downside risk. This paper investigates conventional and downside approaches to risk taking into account different measures of downside beta coefficients. A further contribution of this research is the development of an alternative approach to testing the CAPM relationship. For this purpose, conditional relationships of the CAPM are proposed in which risk premiums are set separately in bull and bear periods. Using equity data and portfolios from the United Kingdom, we obtained positive and statistically significant downside risk premiums. We observed a slight advantage of downside measures over conventional beta measures. Conditional models provide evidence of a positive risk premium in rising markets and a negative risk premium in falling markets. The robustness analysis in subperiods indicates that these findings are largely unchanged for downside beta coefficients, which is not fulfilled by the model in a variance approach.     

Relationship between franking credits and the market risk premium: a comment

This paper examines two arguments presented in Gray and Hall (2006). First, that the generally used estimate of 0.06 for the market risk premium within the Officer version of the capital asset pricing model (CAPM) and the generally used estimate of 0.50 for the parameter ‘gamma’ within the Officer framework are jointly inconsistent with evidence concerning the market risk premium in the standard version of the CAPM. Second, that the first two of these parameter estimates are also jointly inconsistent with the observed cash dividend yield on the Australian market. To resolve these problems, Gray and Hall recommend setting gamma to zero. The present paper shows that the first argument does not account for the fact that imputation induces a reduction in the market risk premium as defined in the standard version of the CAPM. The present paper also shows that both arguments identify a problem that characterizes only parts of the Officer framework, and these parts are not generally used in Australia. Therefore, rather than suggesting that gamma should be zero, Gray and Hall's analysis identifies parts of the Officer framework that should be avoided.     

IPO first‐day returns: Skewness preference,investor sentiment and uncertainty underlying factors

In this paper, we investigate the initial public offering (IPO) first-day returns. Our focus is to examine the irrational component of the agent behavior towards IPO lotteries. Based on 234 French IPOs performed between 2002 and 2012, we find that IPOs with high initial returns have higher idiosyncratic skewness, turnover and momentum. This finding provides empirical evidence for investors' preference for stocks with lottery-like features and investor sentiment. In addition, we show that the skewness preference and the investor sentiment effect are stronger during periods of favorable market conditions. Our results are robust to the integration of uncertainty underlying factors.     

The Conditional CAPM and the Cross-Section of Expected Returns

Most empirical studies of the static CAPM assume that betas remain constant over time and that the return on the value-weighted portfolio of all stocks is a proxy for the return on aggregate wealth. The general consensus is that the static CAPM is unable to explain satisfactorily the cross-section of average returns on stocks. We assume that the CAPM holds in a conditional sense, i.e., betas and the market risk premium vary over time. We include the return on human capital when measuring the return on aggregate wealth. Our specification performs well in explaining the cross-section of average returns.     

市场摩擦对特质风险溢价的影响效应——基于A股主板市场的实证分析

与国外发达市场相比,我国A股主板市场的市场摩擦因素对市场微观结构和资产定价的影响更大。在防范和化解系统性风险的过程中,进一步分析市场摩擦如何作用于特质风险定价效应的问题具有重要的理论和现实意义。本文通过采用多维市场摩擦指标来代理信息不对称、交易成本、买卖限制、卖空限制、风险对冲和外部冲击,检验中国股市特质风险和预期收益率的关系,并判断出市场摩擦因素间的差异性影响机制。回归发现,市场摩擦和特质风险因子(特质波动率和特质偏度)都具有定价效应。各维度市场摩擦因素降低了股票流动性,进而增强了特质波动率的负向定价效应,部分解释了“特质波动率之谜”,但市场摩擦对特质偏度因子溢价的影响较为微弱。同时,基于特质波动率和特质偏度因子的投资策略能够产生超越CAPM、三因子和五因子模型的绝对收益,并印证了市场摩擦对特质风险因子绝对收益的影响作用。     

The spirit of capitalism, asset pricing and growth in a small open economy

Conventional models of economic behavior have failed to account for a number of observed empirical regularities in macroeconomics and international economics. This may be due to preference specifications in conventional models. In this paper, we consider preferences with the “spirit of capitalism” (the desire to accumulate wealth as a way of acquiring status). We analyze a number of potential effects of international catching-up and the spirit of capitalism on savings, growth, portfolio allocation and asset pricing. Moreover, we obtain a multi-factor Capital Asset Pricing Model (CAPM). Our results show that status concerns have non-trivial effects on savings, growth, portfolio allocation, asset prices and the foreign exchange risk premium.     

Conditional coskewness and asset pricing

We explore the empirical usefulness of conditional coskewness to explain the cross-section of equity returns. We find that coskewness is an important determinant of the returns to equity, and that the pricing relationship varies through time. In particular we find that when the conditional market skewness is positive investors are willing to sacrifice 7.87% annually per unit of gamma (a standardized measure of coskewness risk) while they only demand a premium of 1.80% when the market is negatively skewed. A similar picture emerges from the coskewness factor of Harvey and Siddique (Harvey, C., Siddique, A., 2000a. Conditional skewness in asset pricing models tests. Journal of Finance 65, 1263–1295.) (a portfolio that is long stocks with small coskewness with the market and short high coskewness stocks) which earns 5.00% annually when the market is positively skewed but only 2.81% when the market is negatively skewed. The conditional two-moment CAPM and a conditional Fama and French (Fama, E., French, K., 1992. The cross-section of expected returns. Journal of Finance 47,427465.) three-factor model are rejected, but a model which includes coskewness is not rejected by the data. The model also passes a structural break test which many existing asset pricing models fail.     

What Cost of Capital Should You Use? The Market Has an Answer

The most widely used means of estimating a company's cost of equity capital is the Capital Asset Pricing Model (CAPM). But as a growing number of academics and practitioners have suggested, use of the CAPM produces estimates that often fail to reflect the risks of the companies as perceived by current and potential investors. The authors' work, together with other research, also suggests that the cost of equity produced by the CAPM is often too high. To the extent this is so, companies are discounting investment projects at rates of return that may be leading them to pass up value‐adding opportunities. The authors advocate the use of a simple and practical alternative to the CAPM that does not use either an assumed market risk premium or a beta. It uses instead an equity premium that is implied by the current market price of a company's stock and, as such, is implicitly derived from investors' assessments of the firm's risk that are reflected in that price. More specifically, the alternative approach solves for the internal rate of return that equates the present value of expected future cash flows to the current market price. In support of this approach, studies have shown that such market‐implied measures are better predictors than CAPM‐based estimates of future stock returns, both at the individual‐firm and aggregate market levels.     

Pricing temperature derivatives with a filtered historical simulation approach

In this paper, we propose pricing temperature derivatives using a filtered historical simulation (FHS) approach that amalgamates model-based treatment of volatility and empirical innovation density. The FHS approach implicitly captures the risk premium with the entire risk-neutral model (except the innovation distribution), thereby providing significantly more flexibility than existing methods that use only one designated parameter to capture the risk premium. Additionally, instead of relying on the fitted innovation distribution, the FHS approach uses empirical innovations to capture excess skewness, excess kurtosis, and other non-standard features in the temperature data, all of which are important for the correct pricing of temperature derivatives. We apply the FHS approach to pricing derivatives written on the temperature of Chicago, and demonstrate that this approach yields better in-sample and out-of-sample pricing performance than the constant market price of risk method and the consumption-based method.     

Market skewness risk and the cross section of stock returns

The cross section of stock returns has substantial exposure to risk captured by higher moments of market returns. We estimate these moments from daily Standard & Poor's 500 index option data. The resulting time series of factors are genuinely conditional and forward-looking. Stocks with high exposure to innovations in implied market skewness exhibit low returns on average. The results are robust to various permutations of the empirical setup. The market skewness risk premium is statistically and economically significant and cannot be explained by other common risk factors such as the market excess return or the size, book-to-market, momentum, and market volatility factors, or by firm characteristics.     

Beyond CAPM: estimating the cost of equity considering idiosyncratic risks

The present study proposes a new evaluation approach aimed at estimating the cost of equity through standardized models which consider an innovative set of firm-specific information on the main unsystematic risks which are typical of any business. Our objective is extending the Capital Asset Pricing Model (CAPM) by defining a standard formula for quantifying the premium for certain idiosyncratic risks as a function of a new set of firm-specific quantitative information. We define two econometric models, for listed and non-listed firms respectively, which consider five idiosyncratic risk factors: firm size, value factor, operating risks, financial structure and stock market price volatility. The models were tested on a sample of European non-financial companies. The empirical results show that while the CAPM systematically underestimates the cost of equity, the proposed models correctly estimate its expected value; furthermore, they show a slight improvement also in terms of estimates’ volatility. Due to their efficacy and ease of use, the proposed models represent a valid practical tool for investors, analysts and professional evaluators. This work contributes to the existing literature by proposing a typologically innovative extension of the CAPM set of explanatory variables, defining and testing new models for the estimation of the unsystematic risks’ spread of the cost of equity based on an original set of firm-specific accounting and market information.     

CORPORATE CAPITAL COSTS: A PRACTITIONER'S GUIDE

Central to modern finance theory is an understanding of the cost of capital—the minimum required rate of return that is used by companies and investors for both valuation and ongoing performance measurement. This paper provides new insights into the market risk premium for U.S. equities, as well as better methods for measuring and quantifying a company's systematic risk. In so doing, it furnishes evidence that stock market investors now expect a 5% return premium over 30-year government bonds—a decline from the 6–8% premiums suggested by the Ibbotson-Sinquefeld data that extends from 1926 to the present. The author argues that, because of structural changes in the global economy and capital markets, only the most recent 40 or 50 years of data are relevant for estimating current risk premiums. Like the article that precedes it, this article also notes that the 30-year Treasury bond has an increasing component of systematic risk, and the author provides a method of applying the CAPM that removes that risk component from the "risk-free" rate and shifts it to the market risk premium.     

AN EXAMINATION OF THE SMALL-FIRM EFFECT ON THE BASIS OF SKEWNESS PREFERENCE

This paper tests the hypothesis that the small-firm effect can be explained on the basis of investor preference for positive skewness. Traditional stochastic dominance methodology is extended to consider portfolios including variable weights of investment in a riskless asset. Including a riskless asset provides the result that small-firm portfolios stochastically dominate all other portfolios. This result, which is derived on the basis of 19 years of monthly returns, indicates that the small-firm effect cannot be fully attributed to tax effects, benchmark error, or incorrect assumptions of the CAPM about investor risk aversion.