Information and capital asset pricing

Investors in a market frequently update their diverse perceptions of the values of risky assets, thus invalidating the classic capital asset pricing model's (CAPM) assumption of complete agreement among investors. To accommodate information asymmetry and belief updating, we have developed an empirically testable information-adjusted CAPM, which states that the expected excess return of a risky asset/portfolio is solely determined by the information-adjusted beta rather than the market beta. The model is then used to analyze empirical anomalies of the classic CAPM, including a flatter relation between average return and the market beta than the CAPM predicts, a non-zero Jensen's alpha, insignificant explanatory power of the market beta, and size effect.     

The CAPM strikes back? An equilibrium model with disasters

Embedding disasters into a general equilibrium model with heterogeneous firms induces strong nonlinearity in the pricing kernel, helping explain the empirical failure of the (consumption) CAPM. Our single-factor model reproduces the failure of the CAPM in explaining the value premium in finite samples without disasters and its relative success in samples with disasters. Due to beta measurement errors, the estimated beta-return relation is flat, consistent with the beta “anomaly,” even though the true beta-return relation is strongly positive. Finally, the consumption CAPM fails in simulations, even though a nonlinear model with the true pricing kernel holds exactly by construction.     

A Close Connection between the Disciplines of Industrial Organization and Finance: A Worthy Objective or a Bridge Too Far?

Periodically, the question of whether there ought to be a substantially closer connection between the disciplines of industrial organization (IO) and finance has been a topic of conversation within the IO discipline. After documenting three such initiatives that ultimately failed to have lasting effects, this article argues that a goal of a close interweaving of IO and finance is a chimera – but that more modest interactions have been and continue to be possible.     

Accounting information,disclosure, and expected utility: Do investors really abhor uncertainty?

Investors are said to “abhor uncertainty,” but if there were no uncertainty they could earn only the risk‐free rate. A fundamental result in the analytical accounting literature shows that investors buying into a CARA‐normal CAPM market pay lower asset prices, gain higher ex‐ante expected returns, and obtain higher expected utility, when the market payoff has higher variance. New investors obtain similar “welfare” gains from risk under a log/power utility CAPM. These results do not imply that investors “abhor information.” To realize investors' ex‐ante expectations, the subjective probability distributions representing market expectations must be accurate. Greater payoff risk can add to investors' expected utility, but higher ex‐post(realized) utility comes from better information and more accurate ex‐ante expectations. An important implication for accounting is that greater disclosure can have the simultaneous effects of (i) exposing more fully or perceptibly firms' payoff uncertainty, thereby increasing new investors' expected utility, and (ii) improving market estimates of firms' payoff parameters (means, variances, covariances), thereby giving investors a better chance of realizing their expectations. Paradoxically, better information can be valuable to new investors by exposing more fully and more accurately the risk in firms' business operations and results–new investors maximizing expected utility want both more risk and better information.     

Time-varying Beta Risk for Australian Industry Portfolios: An Exploratory Analysis

The central focus of this paper is to provide an initial exploratory examination of ex post time-varying beta estimation, modeling and asset pricing tests. In particular, these issues are investigated using a sample of monthly data on Australian industry portfolios over the nineteen-year period 1974 to 1992. While primarily illustrative in nature, the industry betas are modeled, estimated and tested with reasonable success in terms of regimes related to periods of regulation/deregulation/imputation; the level of market returns; and a measure of volatility on the risk-free rate of interest. However, univariate and multivariate tests reported in the paper provided mixed evidence concerning the applicability of a time-varying beta CAPM, that incorporates these variables.     

REGULATION AND RISK: A CROSS‐COUNTRY SURVEY OF REGULATED COMPANIES

This paper tests empirically whether regulation characterized by high incentives implies more risk to firms than regulation characterized by low incentives. Using a worldwide panel of 170 regulated companies operating in electricity, gas, water, telecommunication and transportation sectors during the period 1995–2004, I find that different regulatory regimes do not result in different levels of risk to their regulated firms. This result could be driven by a higher level of development of financial markets combined with a sophisticated diversifying behaviour of regulated firms.     

Foreign Under‐Investment in US Securities and the Role of Relational Capital

Over 70 academic papers attempt to explain why foreigners invest in US securities. All ignore the vital role of the US broker‐dealer. Macroeconomic factors like a trade balance or corporate governance may guide foreign investors toward certain markets. But US broker‐dealers provide information to foreign investors and execute the actual trades. We hypothesize that particular foreign investors under‐invest in US securities because of a lack of relational capital with US broker‐dealers. We find that broker‐dealer marketing intensity in foreign markets partly explains foreigners’ decisions to invest in US securities. We also estimate “pent‐up” demand for US securities in developing countries – like China, Argentina, Turkey and Russia –equals roughly half‐a‐trillion dollars. Such pent‐up demand – represented as a convergence gap with investment‐to‐GDP ratios in highly developed capital markets – helps predict which markets these broker‐dealers are likely to invest marketing effort in the future. As such, broker‐dealers interested in assisting foreign investors find the right securities for their portfolios should not focus on big, rich economies. They should focus on economies with the largest convergence gaps. We also find that broker‐dealers must take in account the effect their marketing effort has on the typical variables (like relative returns, risks, asymmetric shocks and communication with the US) when they use these screening variables in deciding where to build their relational capital (and place their sales effort) in any year.     

The Colombian Stock Market: 1930-1998

Abstract

This article studies the behavior of the stock market in Colombia with the information given by the Bolsa de Bogota Index (Indice de la Bolsa de Bogota, IBB). The index is analyzed from January, 1930 to December, 1998. The inflation rate covers the same period; the inflation rate as measured by the Consumer Price Index. The results of this analysis show that monthly and per annum return-nominal and real-are well below from the expected return of any financial investor. A first hypothesis to explain this is that the investor and entrepreneurs receive benefits that are non-measurable in terms of economic return. Also it can be said that inflation is negative to the return at the stock market, thus: the larger the inflation rate, the smaller the real return. It is shown that the market does not anticipate the future inflation, and of course it is not included in the actual price. Probabilities for selected real return values are presented. The probability to obtain a real return greater than 0% and other values (5%, 10%, 12% and 18%) as well, is much less than 50%. This might show that investing at the stock market is just gambling.     

CAPM模型对我国股票市场的影响

通过对CAPM模型中系统风险系数β的分析,进一步说明目前我国的证券市场许多条件都不能满足CAPM模型严格的假设前提的条件下,这就造成了其在我国证券市场的使用环境受到限制,因此必须对CAPM的应用做出相应的改进,使投资组合理论更好地指导我们投资。     

Keeping up with the Joneses and optimal diversification

Peer-effects have been shown to affect behavior, and can generally lead to investments choices that are mean–variance inefficient. This paper analyzes optimal diversification with peer-effects. We show that if individuals have keeping-up with the Joneses preferences and they take their peer-group reference as the market portfolio, Markowitz’s mean–variance efficiency analysis and the CAPM equilibrium are intact. This holds for any keeping-up preferences, as well as heterogeneous combinations of such preferences. These results also extend to the Merton–Levy segmented-market model.