Unbiased estimation of expected return using CAPM

Estimation of expected return is required for many financial decisions. For example, an estimate for cost of capital is required for capital budgeting and cost of equity estimates are needed for performance evaluation based on measures such as EVA. Estimates for expected return are often based on the Capital Asset Pricing Model (CAPM), which states that expected excess return (expected return minus the risk-free rate) is equal to the asset's sensitivity to the world market portfolio (β) times the risk premium on the “world market portfolio” (the market risk premium). Since the world market portfolio, by definition, contains all assets in the world, it is not observable. As a result, an estimate for expected return is commonly obtained by taking an estimate for β based on some index (as a proxy for the world market portfolio) and an estimate for the market risk premium based on a potentially different index and multiplying them together. In this paper, it is shown that this results in a biased estimate for expected return. This is undesirable since biased estimates lead to misallocation of funds and biased performance measures. It is also shown in this paper that the straightforward procedure suggested by Fama and MacBeth [J. Financ. Econ. 1 (1974) 43] results in an unbiased estimate for expected return. Further from the analysis done, it follows that, for an unbiased estimate, it does not matter what proxy is used, as long as it is used correctly an unbiased estimate for expected return results.     

Time Inhomogeneous Multiple Volatility Modeling

Price variations at speculative markets exhibit positive autocorrelationand cross correlation. Due to large parameter spaces necessaryfor joint modeling of variances and covariances, multivariateparametric volatility models become easily intractable in practice.We propose an adaptive procedure that identifies periods ofsecond-order homogeneity for each moment in time. To overcomethe high dimensionality of the problem we transform the multivariateseries into a set of univariate processes. We discuss thoroughlythe implementation of the adaptive technique. Theoretical andMonte Carlo results are given. We provide two applications ofthe new method. For a bivariate exchange rate series we comparethe multivariate GARCH approach with our method and find thelatter to be more in line with the underlying assumption ofindependently distributed innovations. Analyzing a 23-dimensionalvector of asset returns we underscore the case for adaptivemodeling in high-dimensional systems.     

Contrarian Investment in the Dutch Stock Market

The efficient markets hypothesis states that at any times security prices fully reflect all available information. Contrarian investment strategies do not recognize the efficiency of capital markets. They call for buying undervalued stocks, i.e. stocks with a low price relative to their fundamentals. The idea behind such a strategy is to take advantage of the extrapolation behaviour of naive investors. Using a fresh and extensive data set from the Dutch stock market, we found that these strategies yield an outperformance without a higher risk. Our results make it hard to maintain the efficient market hypothesis.     

Simulating the Evolution of the Implied Distribution

Motivated by the implied stochastic volatility literature (Britten–Jones and Neuberger, forthcoming; Derman and Kani, 1997; Ledoit and Santa–Clara, 1998) this paper proposes a new and general method for constructing smile–consistent stochastic volatility models. The method is developed by recognising that option pricing and hedging can be accomplished via the simulation of the implied risk neutral distribution. We devise an algorithm for the simulation of the implied distribution, when the first two moments change over time. The algorithm can be implemented easily, and it is based on an economic interpretation of the concept of mixture of distributions. It can also be generalised to cases where more complicated forms for the mixture are assumed.     

Catching up with the Americans

This paper develops an international version of the consumption-based capital asset pricing (CCAPM), which we refer to as “catching up with the Americans.” Previous CCAPM research develops the concept of “catching up with the Joneses,” where a representative economic agent exhibits higher marginal utility of consumption as a result of higher past per capita consumption in his own country. Catching up with the Americans, on the other hand, is an international habit-preference hypothesis. It extends the idea of catching up with the Joneses by stating that consumers of non-U.S. countries gain higher marginal utility of consumption as a result of higher past American consumption growth. Contrary to much of the CCAPM literature, we test this version of the model using long bond rates rather than equity returns. However, like most of the previous research on the CCAPM, the catching up with the Americans model fails to explain the relationship between consumption and asset returns.     

The anticipated and concurring effects of the EMU: exchange rate volatility, institutions and growth

Reduced exchange rate volatility and higher and less heterogeneous quality of institutional rules and macroeconomic policies are two of the main (anticipated and concurring) effects expected from a currency union.In this paper, we measure the magnitude of these two effects for the Eurozone countries looking at real effective exchange rates (REER) and at different indicators of quality of institutional rules and macroeconomic policies (QIRMP). We find that the first effect is much stronger than the second when we compare relative changes for Eurozone countries and the rest of the world in the relevant period.We further evaluate the impact of both effects on economic growth on a larger sample of countries. Our findings show that both have significant impact on levels (more robust) and on rates of growth (weaker) of per capita GDP.     

Relative Guarantees

Many real-world financial contracts have some sort of minimum rate of return guarantee included. One class of these guarantees is so-called relative guarantees, i.e., guarantees where the minimum guaranteed rate of return is given as a function of the stochastic return on a reference portfolio. These guarantees are the topic of this paper. We analyse a wide range of different functional specifications for the minimum guaranteed rate of return, hereunder both so-called maturity and multi-period guarantees. Several closed form solutions are presented.     

调配产权收益完善资产负债结构

国资监督机构在深化国资国企过程中应集中调配产权权益,完善资产负债结构,优化资源配置,通过资本运营和良好的市场环境,充分发挥中央和地方政府的职能,在互为尊重的前提下,杜绝侵权行为的发生。     

Effectiveness and Effects of China’s Capital Controls

I. IntroductionNations at every stage of development and in every region of the world are more closelylinked through trade in goods and services, through flows of funds and investments ineach others’ economies than ever before. But in sharp contrast to more and more nationsloosening restrictions on international trade, controls over capital flows are still substantialnearly everywhere except in the most developed economies. This is certainly the case inChina, where restrictions on movements …