Are the Fama and French Factors Global or Country Specific?

This article examines whether country-specific or global versionsof Fama and French's three-factor model better explain time-seriesvariation in international stock returns. Regressions for portfoliosand individual stocks indicate that domestic factor models explainmuch more time-series variation in returns and generally havelower pricing errors than the world factor model. In addition,decomposing the world factors into domestic and foreign componentsdemonstrates that the addition of foreign factors to domesticmodels leads to less accurate in-sample and out-of-sample pricing.Practical applications of the three-factor model, such as costof capital calculations and performance evaluations, are bestperformed on a country-specific basis.     

Estimation of expected return: CAPM vs. Fama and French

Most practitioners favour a one-factor model (CAPM) when estimating expected return for an individual stock. For estimation of portfolio returns, academics recommend the Fama and French three-factor model. The main objective of this paper is to compare the performance of these two models for individual stocks. First, estimates for individual stock returns based on CAPM are obtained using different time frames, data frequencies, and indexes. It is found that 5 years of monthly data and an equal-weighted index, as opposed to the commonly recommended value-weighted index, provide the best estimate. However, performance of the model is very poor; it explains on average 3% of differences in returns. Then, estimates for individual stock returns are obtained based on the Fama and French model using 5 years of monthly data. This model, however, does not do much better; independent of the index used, it explains on average 5% of differences in returns. These results therefore bring into question the use of either model for estimation of individual expected stock returns.     

Stock returns and the Miller Modigliani valuation formula: Revisiting the Fama French analysis

Fama and French (2006) use the dividend-discount model to develop the role of expected profitability, expected investment, and the book-to-market ratio as predictors of stock returns. One reported empirical result is anomalous. The valuation model establishes that the comparative static relation between expected returns and expected investment is negative, yet it appears to be positive and insignificant. We show that the posited valuation relations apply at the firm level, and not at the per share level at which they were tested. Once the variables are measured at the firm level, all the Fama French predictions are validated.     

Flight-to-quality,economic fundamentals,and stock returns

We find that the order flow differential (OFD), a flight-to-quality measure constructed as the difference between large- and small-cap stock order flows, strongly and negatively forecasts output growth and interest rates in the U.S. The predictive ability of OFD for future macroeconomic fundamentals is robust to the inclusion of return factors and business cycle predictors, and it is thus a state variable candidate in the spirit of Merton (1973). Consistent with this view, we document that OFD commands a statistically significant negative risk premium in cross-sectional asset pricing tests.     

Reliability and relevance of fair values: private equity investments and investee fundamentals

Review of Accounting Studies - We directly test the reliability and relevance of investee fair values reported by listed private equity funds (LPEs). In our setting, disaggregated fair value...     

Short-run forecasting of the euro-dollar exchange rate with economic fundamentals

We propose a fundamentals-based econometric model for the weekly changes in the euro-dollar rate with the distinctive feature of mixing economic variables quoted at different frequencies. The model obtains good in-sample fit and, more importantly, encouraging out-of-sample forecasting results at horizons ranging from one-week to one month. Specifically, we obtain statistically significant improvements upon the hard-to-beat random-walk model using traditional statistical measures of forecasting error at all horizons. Moreover, our model obtains a great improvement when we use the direction of change metric, which has more economic relevance than other loss measures. With this measure, our model performs much better at all forecasting horizons than a naive model that predicts the exchange rate as an equal chance to go up or down, with statistically significant improvements.     

Stock market uncertainty and economic fundamentals: an entropy-based approach

This study investigates the effects of stock market uncertainty on economic fundamentals, represented by economic activities and systemic risk, in China. To capture the uncertainty in the Chinese stock market precisely, we use the entropy measure through symbolic time-series analysis. The empirical findings reveal strong spillover effects from stock market uncertainty to economic fundamentals. Specifically, an uncertainty shock generates (i) a short-term decline in industrial production, (ii) a rapid drop and rebound in the composite leading indicator, and (iii) an increase in systemic risk. To understand these findings, we suggest and validate the transmission channel through changes in consumption and investment.     

An empirical inquiry into the short-run dynamics of output,prices and exchange market pressure

In this paper we develop a short-run disequilibrium model for the interaction of output, prices and exchange-market pressure. In this model we consider the trade-off between movements in exchange rates and movements in international reserves and we also incorporate and test purchasing power parity as a long-run hypothesis. The specification adopted preserves the properties of the monetary approach to exchange rates and the balance of payments in the long run. The theoretical model is applied to the small open economy of Greece for the period 1975–1981.     

Asymmetry in the effects of economic fundamentals on rising and falling exchange rates

Empirical research provides evidence for exchange rates overreaction to changes in economic fundamentals over a short run, but convergence in a long run. In this research we use statistical method developed by Cox [Cox, D.R., “Regression models and life-tables,” Journal of the Royal Statistical Society. Series B (Methodological), Vol. 34, Iss. 2 (1972), 187-220.] to examine the differences in the effects of local economic fundamentals on the probability of occurrence of extreme fluctuations in exchange rates over time periods of rising and falling exchange rates. We identify an extreme fluctuation as a 10% decrease or increase in exchange rate over a three month period and 20% over a one year period. We find asymmetry in the effects of economic fundamentals on exchange rates (eight countries' exchange rates quoted as f/$) during time periods of rising and falling exchange rates: the probability of extreme fluctuation is greater during time periods of rising exchange rates as compared to falling.     

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.     

An empirical analysis of the interfirm equity investment process

This paper measures the effects on stock proces of corporate investments in 5% or more of another company's equity securities. Such investments initiate a process that may end with a takeover, targeted repurchase, takeover by a third party, or sale of the shares. The total valuation effect of the investment for acquiring and target firms includes returns at disclosure of the investment position, the outcome announcement, and related intervening events. For example, the positive return for target firms at initial disclosure of the investment more than offsets the negative return at a targeted repurchase.     

An actuarial analysis of the French bonus-malus system

The bonus-malus system in force in France differs from most of those used in industrialized countries around the world. Policyholders do not move inside a scale but their premium is obtained with the help of multiplicative CRM coefficients (CRM stands for the acronym of the French coefficient de réduction-majoration). The French bonus-malus system has been the topic of very few scientific investigations in the actuarial literature. This paper purposes to analyze this bonus-malus system in details. Despite its apparent simplicity, it will be seen that it leads to nontrivial mathematical problems. The financial equilibrium of the bonus-malus system is also investigated thanks to the multivariate De?Pril's algorithm for the convolution of independent and identically distributed random vectors.     

我国房产养老保险制度的探讨

改革开放以来,中国人口年龄结构发生了历史性变化,老龄化程度日益加重.房产养老保险正是顺应时代发展和符合时代要求的一种解决养老问题的金融创新工具,对房产养老保险的制度框架进行分析,是这种创新产品得以成功推广的前提.本文结合我国房产养老保险现状与美国房产价值可转换抵押贷款的发展,设计了我国房产养老保险的制度框架,明确了房产...     

An investigation of the stability of returns in Western European equity markets

This paper investigates the temporal stability of various dimensions of the returns of 16 European stock markets that are relevant to an analysis of international portfolio diversification. The basic data consist of daily stock market price indices for these markets. This group of indices comprehends a wide range of stock markets differentiated by size, age and technological sophistication, but in each case located in Western Europe. Two main tests were conducted: (a) ANOVA to identify inter-temporal variability and inter-market variability over 24 three-month sub-periods from January 1989 to December 1994, and (b) cluster analysis to identify groups of markets that exhibit similar behaviour patterns. The findings suggest that, while the potential gains from an internationally diversified portfolio restricted to the equities of Western European markets appear to be substantial, the lack of inter-temporal stability in the composition of the optimal portfolio from one period to another makes these gains difficult to achieve in practice.     

An economic analysis of leasebacks

Leaseback decisions by firms involve the simultaneous sale of an asset and a lease agreement with the new owner. Examination of 64 leaseback decisions made by firms during 1979–1987 reveals a significant negative announcement effect. We present a theoretical framework in which all firms prefer to leaseback when there is symmetric information. When there is asymmetry of information between the manager and the market, however, firms with favorable prospects prefer to own the asset. Firms with poor prospects choose to leaseback and capture the associated depreciation tax shield through the sale. Our empirical results indicate that, besides the significant negative announcement effect, firms proposing a leaseback earn negative returns in the three months prior to the announcement. We monitor the performance of these firms for five years after the leaseback decision and compare it to five years before the announcement. There is a significant drop in operating performance as indicated by several key variables such as operating earnings before depreciation and pretax earnings. This is consistent with the hypothesis that firms choose to leaseback when faced with unfavorable future prospects. I would like to thank S.P. Kothari, Cheng-few Lee, Scott Linn, Mike Rozeff, Ramasastry Ambarisha, and an anonymous referee for their comments and suggestions. The usual disclaimer applies.     

贫困经济学研究

贫困现象的存在是一个无法回避和难以消除的客观现实。贫困形成的原因是十分复杂的,既有人文资源的又有自然环境的,既有历史的又有现实的,．．,常常是几种原因交错,需要“外力”援助。这种“外力”即来自于政府－扶持贫困是政府的天职。     

Efficiency and equity consequences of decentralized government: An application to Spain

Spain's federal system of government has evolved over the last fifteen years in the wake of Franco's centralized system of government. The Autonomias, or state-level governments, were formed from the provinces during the late 1970s and early 1980s and provide the basis for a new federal structure of government. While great strides have been made in decentralizing government, certain features retain a decidedly centralized structure. In particular, the central government determines the size of the budget of the Autonomias, leaving little room for the decentralized governments to satisfy the possibly diverse preferences of their respective citizenries. This paper investigates the equity and efficiency consequences of the current system relative to a system with decentralized revenue sources.     

Foreign news and the structure of co-movement in European equity markets: An intraday analysis

We investigate European equity market volatility responses to foreign macroeconomic surprises. We measure the length of the response and decompose the news effect into direct and indirect components. The latter is induced by volatility transmission between equity markets. We show that 50 percent of the total accumulated impact of US macroeconomic news on the DAX 30 and CAC 40 volatilities is attained after 90 min. We find that the news announcements have significant direct impacts on both European indices but the indirect effect on the French index is stronger than that on the German.