The term structures of equity and interest rates

This paper proposes a dynamic risk-based model capable of jointly explaining the term structure of interest rates, returns on the aggregate market, and the risk and return characteristics of value and growth stocks. Both the term structure of interest rates and returns on value and growth stocks convey information about how the representative investor values cash flows of different maturities. We model how the representative investor perceives risks of these cash flows by specifying a parsimonious stochastic discount factor for the economy. Shocks to dividend growth, the real interest rate, and expected inflation are priced, but shocks to the price of risk are not. Given reasonable assumptions for dividends and inflation, we show that the model can simultaneously account for the behavior of aggregate stock returns, an upward-sloping yield curve, the failure of the expectations hypothesis, and the poor performance of the capital asset pricing model.     

金融状况指数显示：经济低位增长，物价相对平稳

金融状况指数（FCI）是基于货币价格和资产价格等变量编制的综合性指标,以弥补货币供应量、利率等传统指标的不足。文章选取货币供应量、利率、汇率、股票指数和房地产价格等指标,采用主成分分析方法构建FCI。结果显示,从FCI本身的走势看,目前处在下行态势,低于近十年的平均值;从其领先经济指标的性质判断,未来经济增长将低位平稳运行,物价上行压力不大。     

A股市场股权风险溢价的历史及启示

本文计算了1992～2000年、2001～2005年以及1992～2005年三个时间窗口下A股市场的股权风险溢价率；基于历史数据，就投资者所要求的股权风险溢价、通货膨胀与股权风险溢价的关系等问题进行了初步分析；相关分析也隐含了A股市场发展的政策建议。     

Incomplete Information, Heterogeneity, and Asset Pricing

We consider a pure exchange economy where the drift of aggregateconsumption is unobservable. Agents with heterogeneous beliefsand preferences act competitively on financial and goods markets.We discuss how equilibrium market prices of risk differ acrossagents, and in particular we discuss the properties of the marketprice of risk under the physical (objective) probability measure.We propose a number of specifications of risk aversions andbeliefs where the market price of risk is much higher, and theriskless rate of return lower, than in the equivalent full informationeconomy (homogeneous and heterogeneous preferences) and thuscan provide an(other) answer to the equity premium and risk-freerate puzzles. We also derive a representation of the equilibriumvolatility and numerically assess the role of heterogeneityin beliefs. We show that a high level of stock volatility canbe obtained with a low level of aggregate consumption volatilitywhen beliefs are heterogeneous. Finally, we discuss how incompleteinformation may explain the apparent predictability in stockreturns and show that in-sample predictability cannot be exploitedby the agents, as it is in fact a result of their learning processes.     

Did expected returns fall? Evidence from UK size portfolios

Ex post equity returns were extremely high during the latter part of the twentieth century and in particular during the 1990s. Many observers suggest ex post returns have been higher than expected returns. This article suggests, in the case of the UK, that the largest firms primarily cause the appearance of a shift in expected returns during the 1990s. The article presents some novel evidence consistent with an earlier shift in expected returns for small- and medium-sized firms in the early 1980s. However, evidence from structural break tests on valuation ratios is consistent with either moderate changes in long-term expected fundamental growth or long-term expected returns; it is difficult to distinguish statistically between these two competing explanations.     

Forecasting stock market returns: The sum of the parts is more than the whole

We propose forecasting separately the three components of stock market returns—the dividend–price ratio, earnings growth, and price–earnings ratio growth—the sum-of-the-parts (SOP) method. Our method exploits the different time series persistence of the components and obtains out-of-sample R-squares (compared with the historical mean) of more than 1.3% with monthly data and 13.4% with yearly data. This compares with typically negative R-squares obtained in a similar experiment with predictive regressions. The performance of the SOP method comes mainly from the dividend–price ratio and earnings growth components, and the robustness of the method is due to its low estimation error. An investor who timed the market using our method would have had a Sharpe ratio gain of 0.3.     

The UK Equity Premium: 1901–2004

Abstract:  This paper examines the UK equity premium over more than a century using dividend growth to estimate expectations of capital gains employing the approach of Fama and French (2002) . Over recent decades estimated equity premia implied by dividend growth have been much lower than that produced by average stock returns for the UK market as a whole; a finding corroborated by all economic sub-sectors. The empirical analysis suggests this is primarily due to a declining discount rate, during the latter part of the 20th century, which would rationally stimulate unanticipated equity price rises during this period. Thus, I conclude that historical stock returns over recent decades have been above investors' expectations.     

Estimating the Equity Risk Premium Using Accounting Fundamentals

This study uses recent developments in the theoretical modelling of the links between unrecorded accounting goodwill, accounting profitability and the cost of equity, together with Capital Asset Pricing Model (CAPM) betas, to estimate the ex-ante equity risk premium in the UK. The results suggest that, over our sample period from 1968 to 1995, the premium has been in the region of 5%. Our estimate lends support to the view that the ex-ante equity risk premium is substantially less than the historical average of the excess of equity returns over the risk-free rate, and is similar to the rates applied recently by UK competition regulators.     

Returns after personal tax on UK equity and gilts, 1919–1998

This paper investigates whether personal tax could help explain the size of the historic equity premium in the UK measured before personal tax. If there has been a higher tax burden on equity, some of the premium could be viewed as compensation for tax. It is estimated here that personal tax reduces the arithmetic mean nominal return on equity from 13.3% to 11.1% pa during the period 1919–1998, and the mean return on gilts from 7.1% to 5.6% pa. Thus, personal tax accounts for a slightly higher proportion of the before-tax return on gilts than on equity, implying that the equity premium is not a compensation for a higher tax burden on equity.     

Modeling Asset Premiums and the Riskfree Rate in General Equilibrium CCAPM

We elaborate on the consumption capital asset pricing model (CCAPM) to reveal a set of underlying forces that determine asset returns. We use generalized preferences, allow for labor-leisure choice, a broad asset portfolio, and holding international claims. A calibration of the model with US data learns that excess stock and bond returns can be replicated. At the same time, however, the riskfree interest rate generally appears to be mispriced, consistent with Weil (1989). Additional results show that in general two optimal values of the intertemporal substitution parameter correspond with a specified coefficient of risk aversion. Tests that assess the dynamic properties of the model yield mixed results, but are most favorable when home bias is allowed.