Size and book to market effects and the Fama French three factor asset pricing model: evidence from the Australian stockmarket

The present study adds to the sparse published Australian literature on the size effect, the book to market (BM) effect and the ability of the Fama French three factor model to account for these effects and to improve on the asset pricing ability of the Capital Asset Pricing Model (CAPM). The present study extends the 1981–1991 period examined by Halliwell, Heaney and Sawicki (1999) a further 10 years to 2000 and addresses several limitations and findings of that research. In contrast to Halliwell, Heaney and Sawicki the current study finds the three factor model provides significantly improved explanatory power over the CAPM, and evidence that the BM factor plays a role in asset pricing.     

Improved estimation of the covariance matrix of stock returns with an application to portfolio selection

This paper proposes to estimate the covariance matrix of stock returns by an optimally weighted average of two existing estimators: the sample covariance matrix and single-index covariance matrix. This method is generally known as shrinkage, and it is standard in decision theory and in empirical Bayesian statistics. Our shrinkage estimator can be seen as a way to account for extra-market covariance without having to specify an arbitrary multifactor structure. For NYSE and AMEX stock returns from 1972 to 1995, it can be used to select portfolios with significantly lower out-of-sample variance than a set of existing estimators, including multifactor models.     

西方资产定价理论中的实体经济因素考察——以CAPM模型与B-S期权定价模型为例

本文根据马克思主义经济学有关实体经济因素决定虚拟资本价格的基本原理,分析和评价了CAPM与B-S模型;认为CAPM模型的建模思路存在重大错误;同时还发现,利息率是虚拟资本价格决定中与实体经济连接的重要桥梁,但在虚拟资本价格决定中,仅有利息率一个指标并不能充分反映实体经济的决定作用;本文还因B-S模型建模思路充分考虑了实体经济因素,而从马克思主义经济学角度给予客观评价。     

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.     

Multifactor models and their consistency with the ICAPM

Can any multifactor model be interpreted as a variant of the Intertemporal CAPM (ICAPM)? The ICAPM places restrictions on time-series and cross-sectional behavior of state variables and factors. If a state variable forecasts positive (negative) changes in investment opportunities in time-series regressions, its innovation should earn a positive (negative) risk price in the cross-sectional test of the respective multifactor model. Second, the market (covariance) price of risk must be economically plausible as an estimate of the coefficient of relative risk aversion (RRA). We apply our ICAPM criteria to eight popular multifactor models and the results show that most models do not satisfy the ICAPM restrictions. Specifically, the “hedging” risk prices have the wrong sign and the estimates of RRA are not economically plausible. Overall, the Fama and French (1993) and Carhart (1997) models perform the best in consistently meeting the ICAPM restrictions. The remaining models, which represent some of the most relevant examples presented in the empirical asset pricing literature, can still empirically explain the size, value, and momentum anomalies, but they are generally inconsistent with the ICAPM.     

Socially responsible investing and stock performance: New empirical evidence for the US and European stock markets

This paper empirically examines the theoretically ambivalent relationship between socially responsible investing (SRI) and stock performance. It contributes to the existing literature by considering both the US and the entire European stock markets and by using consistent world-wide corporate sustainability performance data. Our portfolio analysis from 1998 to 2009 is based on the common four-factor model according to Carhart (1997), which comprises market return, size, value, and momentum factors. We show for the US and the European stock markets that SRI is associated with large-sized firms. The insignificant abnormal stock returns for SRI in both regions are the main result of our paper. Therefore, our study supports the view that SRI stocks are correctly priced by market participants, although we cannot rule out that a corresponding mispricing has existed before the beginning of our observation period in 1998.     

Asset Pricing and Hedging in Financial Markets with Transaction Costs: An Approach Based on the Von Neumann–Gale Model

The paper develops a general discrete-time framework for asset pricing and hedging in financial markets with proportional transaction costs and trading constraints. The framework is suggested by analogies between dynamic models of financial markets and (stochastic versions of) the von Neumann–Gale model of economic growth. The main results are hedging criteria stated in terms of “dual variables” – consistent prices and consistent discount factors. It is shown how these results can be applied to specialized models involving transaction costs and portfolio restrictions.     

Money Laundering as a Crime in the Financial Sector: A New Approach to Quantitative Assessment,with an Application to Italy

This study provides an answer to the question of how much cash deposited via a financial institution can be traced back to criminal activities, by developing a new approach to measure money laundering and proposing an application to Italy. We define a model of cash in‐flows on current accounts considering, besides “dirty money” to be laundered, also the legal motivations to deposit cash and the role of the shadow economy. We find that the average amount of cash laundered in Italy is around 6% of GDP. These findings are coherent with estimates of the nonobserved economy obtained in previous studies.     

Returns to Scale,Market Power,and the Nature of Price Rigidity in New Keynesian Models with Self‐Fulfilling Expectations

Increasing returns to scale and firms' market power are two potential sources of sunspot expectations in neoclassical models. We show that in New Keynesian models, returns to scale and market power can have fundamentally different implications for broad macroeconomic issues, including self‐fulfilling expectations, depending on the nature of price rigidity. Our findings suggest that the design of stabilization monetary policy can depend on precise knowledge about the economy's real and nominal features. Therefore, a clear understanding of the specific economic environment and its relevance to monetary policymaking for ensuring macroeconomic stability can be an integrated part of monetary policy practice.