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Creator: Jagannathan, Ravi and Wang, Zhenyu Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 517 Abstract: In empirical studies of the CAPM, it is commonly assumed that (a) the return to the value weighted portfolio of all stocks is a reasonable proxy for the return on the market portfolio of all assets in the economy, and (b) betas of assets remain constant over time. Under these assumptions, Fama and French (1992) find that the relation between average return and beta is flat. We argue that these two auxiliary assumptions are not reasonable. We demonstrate that when these assumptions are relaxed, the empirical support for the CAPM is surprisingly strong. When human capital is also included in measuring wealth, the CAPM is able to explain 28 percent of the cross sectional variation in average returns in the 100 portfolios studied by Fama and French. When, in addition, betas are allowed to vary over the business cycle, the CAPM is able to explain 57 percent. More important, relative size does not explain what is left unexplained after taking sampling errors into account.
关键词: Stock prices and Capital 学科: G12  Asset Pricing; Trading Volume; Bond Interest Rates 
Creator: Jagannathan, Ravi and Wang, Zhenyu Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 517 Abstract: In empirical studies of the CAPM, it is commonly assumed that (a) the return to the value weighted portfolio of all stocks is a reasonable proxy for the return on the market portfolio of all assets in the economy, and (b) betas of assets remain constant over time. Under these assumptions, Fama and French (1992) find that the relation between average return and beta is flat. We argue that these two auxiliary assumptions are not reasonable. We demonstrate that when these assumptions are relaxed, the empirical support for the CAPM is surprisingly strong. When human capital is also included in measuring wealth, the CAPM is able to explain 28 percent of the cross sectional variation in average returns in the 100 portfolios studied by Fama and French. When, in addition, betas are allowed to vary over the business cycle, the CAPM is able to explain 57 percent. More important, relative size does not explain what is left unexplained after taking sampling errors into account.
关键词: Stock prices and Capital 学科: G12  Asset Pricing; Trading Volume; Bond Interest Rates 
Creator: Adam, Klaus, Marcet, Albert, and Nicolini, Juan Pablo Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 720 Abstract: Consumptionbased asset pricing models with timeseparable preferences can generate realistic amounts of stock price volatility if one allows for small deviations from rational expectations. We consider rational investors who entertain subjective prior beliefs about price behavior that are not equal but close to rational expectations. Optimal behavior then dictates that investors learn about price behavior from past price observations. We show that this imparts momentum and mean reversion into the equilibrium behavior of the pricedividend ratio, similar to what can be observed in the data. When estimating the model on U.S. stock price data using the method of simulated moments, we find that it can quantitatively account for the observed volatility of returns, the volatility and persistence of the pricedividend ratio, and the predictability of longhorizon returns. For reasonable degrees of risk aversion, the model generates up to onehalf of the equity premium observed in the data. It also passes a formal statistical test for the overall goodness of fit, provided one excludes the equity premium from the set of moments to be matched.
关键词: Subjective beliefs, Asset pricing, Learning, and Internal rationality 学科: E44  Financial Markets and the Macroeconomy and G12  Asset Pricing; Trading Volume; Bond Interest Rates 
On the Relation Between the Expected Value and the Volatility of the Nominal Excess Return on Stocks
Creator: Glosten, Lawrence R., Jagannathan, Ravi, and Runkle, David Edward Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 505 Abstract: Earlier researchers have found either no relation or a positive relation between the conditional expected return and the conditional variance of the monthly excess return on stocks when they used the standard GARCHM model. This is in contrast to the negative relation found when other approaches were used to model conditional variance. We show that the difference in the estimated relation arises because the standard GARCHM model is misspecified. When the standard model is modified allow for (i) the presence for seasonal patterns in volatility, (ii) positive and negative innovations to returns to having different impacts on conditional volatility, and (iii) nominal interest rates to affect conditional variance, we once again find support for a negative relation. Using the modified GARCHM model, we also show that there is little evidence to support the traditional view that conditional volatility is highly persistent. Also, positive unanticipated returns result in a downward revision of the conditional volatility whereas negative unanticipated returns result in an upward revision of conditional volatility of a similar magnitude. Hence the time series properties of the monthly excess return on stocks appear to be substantially different from that of the daily excess return on stocks.
关键词: Stock market, Rate of return, Risk, Asset valuation, Return rate, and Stocks 学科: G12  Asset Pricing; Trading Volume; Bond Interest Rates and G11  Portfolio Choice; Investment Decisions 
Creator: Chari, V. V., Jagannathan, Ravi, and Ofer, Aharon R. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 364 Abstract: The fiscal year and the calendar year coincide for a large fraction of firms traded in the New York and American Stock Exchanges. It is therefore possible that part of the large positive abnormal return earned by stocks as a group during the first week of trading in January may be due to temporal resolution of uncertainty accompanying the end of the fiscal year. We study this hypothesis by examining whether stocks of firms with fiscal years ending in months other than December also realize positive abnormal returns, following the end of their fiscal years. We find that there are no excess returns for such firms in the first five trading days following the end of the fiscal year.
关键词: Positive abnormal returns, Excess returns, Stock returns, Fiscal year, Cyclical behavior, and January effect 学科: G12  Asset Pricing; Trading Volume; Bond Interest Rates and E32  Business Fluctuations; Cycles 
Creator: Karabarbounis, Loukas and Neiman, Brent Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 749 Abstract: Comparing U.S. GDP to the sum of measured payments to labor and imputed rental payments to capital results in a large and volatile residual or “factorless income.” We analyze three common strategies of allocating and interpreting factorless income, speciﬁcally that it arises from economic proﬁts (Case Π), unmeasured capital (Case K), or deviations of the rental rate of capital from standard measures based on bond returns (Case R). We are skeptical of Case Π as it reveals a tight negative relationship between real interest rates and markups, leads to large ﬂuctuations in inferred factoraugmenting technologies, and results in markups that have risen since the early 1980s but that remain lower today than in the 1960s and 1970s. Case K shows how unmeasured capital plausibly accounts for all factorless income in recent decades, but its value in the 1960s would have to be more than half of the capital stock, which we ﬁnd less plausible. We view Case R as most promising as it leads to more stable factor shares and technology growth than the other cases, though we acknowledge that it requires an explanation for the pattern of deviations from common measures of the rental rate. Using a model with multiple sectors and types of capital, we show that our assessment of the drivers of changes in output, factor shares, and functional inequality depends critically on the interpretation of factorless income.
关键词: Return to capital, Missing capital, Profits, and Factor shares 学科: E01  Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts, E25  Aggregate Factor Income Distribution, E22  Investment; Capital; Intangible Capital; Capacity, and E23  Macroeconomics: Production 
On the Relation Between the Expected Value and the Volatility of the Nominal Excess Return on Stocks
Creator: Glosten, Lawrence R., Jagannathan, Ravi, and Runkle, David Edward Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 157 Abstract: We find support for a negative relation between conditional expected monthly return and conditional variance of monthly return, using a GARCHM model modified by allowing (i) seasonal patterns in volatility, (ii) positive and negative innovations to returns having different impacts on conditional volatility, and (iii) nominal interest rates to predict conditional variance. Using the modified GARCHM model, we also show that monthly conditional volatility may not be as persistent as was thought. Positive unanticipated returns appear to result in a downward revision of the conditional volatility whereas negative unanticipated returns result in an upward revision of conditional volatility.

Creator: Jagannathan, Ravi and Wang, Zhenyu Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 208 Abstract: Most empirical studies of the static CAPM assume that betas remain constant over time and that the return on the valueweighted portfolio of all stocks is a proxy for the return on aggregate wealth. The general consensus is that the static CAPM is unable to explain satisfactorily the crosssection of average returns on stocks. We assume that the CAPM holds in a conditional sense, i.e., betas and the market risk premium vary over time. We include the return on human capital when measuring the return on aggregate wealth. Our specification performs well in explaining the crosssection of average returns.
学科: G10  General Financial Markets: General (includes Measurement and Data) 
Creator: Chari, V. V., Jagannathan, Ravi, and Ofer, Aharon R. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 110 Abstract: An examination of the behavior of stock returns around quarterly earnings announcement dates finds a seasonal pattern: small firms show large positive abnormal returns and a sizable increase in the variability of returns around these dates. Only part of the large abnormal returns can be accounted for by the fact that firms with good news tend to announce early. Large firms show no abnormal returns around announcement dates and a much smaller increase in variability.

Creator: Koijen, Ralph S. J. and Yogo, Motohiro Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 510 Abstract: We develop an asset pricing model with flexible heterogeneity in asset demand across investors, designed to match institutional and household holdings. A portfolio choice model implies characteristicsbased demand when returns have a factor structure and expected returns and factor loadings depend on the assets' own characteristics. We propose an instrumental variables estimator for the characteristicsbased demand system to address the endogeneity of demand and asset prices. Using U.S. stock market data, we illustrate how the model could be used to understand the role of institutions in asset market movements, volatility, and predictability.
关键词: Demand system, Liquidity, Portfolio choice, Asset pricing model, and Institutional investors 学科: G23  Pension Funds; Nonbank Financial Institutions; Financial Instruments; Institutional Investors and G12  Asset Pricing; Trading Volume; Bond Interest Rates