Results 1  10
of
21
Toward a Quantitative General Equilibrium Asset Pricing Model with Intangible Capital
, 2010
"... In the US, the size of intangible investment is similar to that of physical investment. The risk premium for holding physical capital over intangible capital is comparable to the market equity premium. We present a quantitative general equilibrium asset pricing model with intangible capital whose pr ..."
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Cited by 20 (3 self)
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In the US, the size of intangible investment is similar to that of physical investment. The risk premium for holding physical capital over intangible capital is comparable to the market equity premium. We present a quantitative general equilibrium asset pricing model with intangible capital whose predictions are consistent with key features of both macroeconomic quantity dynamics and stylized asset pricing facts. In particular, our model produces: 1) a high spread between the returns of tangible capital and intangible capital; 2) a high premium of the aggregate stock market over the riskfree interest rate; 3) a low and smooth riskfree interest rate; and 4) dynamics for macroeconomic quantities consistent with US data. Our model rationalizes about 75 % of the observed difference in the average return of booktomarket sorted portfolios. 1
A theory of firm characteristics and stock returns: the role of investmentspecific shocks. Working paper
, 2012
"... We provide a theoretical model linking firm characteristics and expected returns. The key ingredient of our model is technological shocks embodied in new capital (IST shocks), which affect the profitability of new investments. Firms ’ exposure to IST shocks is endogenously determined by the fraction ..."
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Cited by 13 (4 self)
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We provide a theoretical model linking firm characteristics and expected returns. The key ingredient of our model is technological shocks embodied in new capital (IST shocks), which affect the profitability of new investments. Firms ’ exposure to IST shocks is endogenously determined by the fraction of firm value due to growth opportunities. In our structural model, several firm characteristics – Tobin’s Q, past investment, earningsprice ratios, market betas, and idiosyncratic volatility of stock returns – help predict the share of growth opportunities in the firm’s market value, and are therefore correlated with the firm’s exposure to IST shocks and risk premia. Our calibrated model replicates: i) the predictability of returns by firm characteristics; ii) the comovement of stock returns on firms with similar characteristics; iii) the failure of the CAPM to price portfolio returns of firms sorted on characteristics; iv) the timeseries predictability of market portfolio returns by aggregate investment and valuation ratios; and v) a downward sloping term structure of risk premia for dividend strips. Our model delivers testable predictions about the behavior of firmlevel real variables – investment and output growth – that are supported by the data.
Wage rigidity: A quantitative solution to several asset pricing puzzles. Working paper
 University of British Columbia and Ohio State University
, 2013
"... ce pte d M an us cri pt ..."
Rare booms and disasters in a multi sector endowment economy”. Working paper,
, 2013
"... Abstract Why do value stocks have higher expected returns than growth stocks, in spite of having lower risk? Why do these stocks exhibit positive abnormal performance while growth stocks exhibit negative abnormal performance? This paper offers a rareevents based explanation, that can also account f ..."
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Cited by 6 (2 self)
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Abstract Why do value stocks have higher expected returns than growth stocks, in spite of having lower risk? Why do these stocks exhibit positive abnormal performance while growth stocks exhibit negative abnormal performance? This paper offers a rareevents based explanation, that can also account for facts about the aggregate market. Patterns in timeseries predictability offer independent evidence for the model's conclusions.
Economic Activity of Firms and Asset Prices
, 2011
"... In this paper we survey the recent research on the fundamental determinants of stock returns. These studies explore how firms ’ systematic risk and their investment and production decisions are jointly determined in equilibrium. Models with production provide insights into several types of empirical ..."
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Cited by 3 (2 self)
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In this paper we survey the recent research on the fundamental determinants of stock returns. These studies explore how firms ’ systematic risk and their investment and production decisions are jointly determined in equilibrium. Models with production provide insights into several types of empirical patterns, including: i) the correlations between firms’ economic characteristics and their risk premia; ii) the comovement of stock returns among firms with similar characteristics; iii) the joint dynamics of asset returns and macroeconomic quantities. Moreover, by explicitly relating firms stock returns and cash flows to fundamental shocks, models with production connect the analysis of financial markets with the research on the origins of macroeconomic fluctuations.
Variance Bounds on the Permanent and Transitory Components of Stochastic Discount Factors. Unpublished Working Paper,
, 2011
"... a b s t r a c t In this paper, we develop lower bounds on the variance of the permanent component and the transitory component, and on the variance of the ratio of the permanent to the transitory components of SDFs. Exactly solved eigenfunction problems are then used to study the empirical attribut ..."
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Cited by 3 (0 self)
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a b s t r a c t In this paper, we develop lower bounds on the variance of the permanent component and the transitory component, and on the variance of the ratio of the permanent to the transitory components of SDFs. Exactly solved eigenfunction problems are then used to study the empirical attributes of asset pricing models that incorporate longrun risk, external habit persistence, and rare disasters. Specific quantitative implications are developed for the variance of the permanent and the transitory components, the return behavior of the longterm bond, and the comovement between the transitory and the permanent components of SDFs. Published by Elsevier B.V.
CrossSectional Asset Pricing Puzzles: A LongRun Perspective †
, 2011
"... This paper proposes an intertemporal asset pricing model within a longrun risk economy featuring a formal cross section of firms characterized by meanreverting expected dividend growth. We find considerable empirical support for the crosssectional implications of the model, as cash flow and retu ..."
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Cited by 2 (1 self)
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This paper proposes an intertemporal asset pricing model within a longrun risk economy featuring a formal cross section of firms characterized by meanreverting expected dividend growth. We find considerable empirical support for the crosssectional implications of the model, as cash flow and returnbased measures of longrun risk exposure are both positively related to returns and offer a partial explanation of the size, value, and momentum anomalies. Interestingly, the model implies a negative relation between exposures to systematic and firmspecific risks in the cross section. Higher cashflow duration firms exhibit higher exposure to economic growth shocks while they are less sensitive to firmspecific news. Such firms command higher risk premiums but exhibit lower analyst forecast dispersion, idiosyncratic volatility, and distress risk. We find theoretical and empirical support of a longrun risk explanation of these anomalies.
Capital Asset Pricing under Ambiguity
"... Abstract This paper generalizes the standard meanvariance paradigm to a meanvarianceambiguity paradigm by relaxing the assumption that probabilities are known and instead assuming that probabilities are themselves random. It extends the CAPM from risk to uncertainty by incorporating ambiguity. Th ..."
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Cited by 1 (0 self)
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Abstract This paper generalizes the standard meanvariance paradigm to a meanvarianceambiguity paradigm by relaxing the assumption that probabilities are known and instead assuming that probabilities are themselves random. It extends the CAPM from risk to uncertainty by incorporating ambiguity. This model makes the distinction between systematic ambiguity and idiosyncratic ambiguity and proves that the ambiguity premium is proportional to systematic ambiguity. It introduces a new measure of uncertainty that combines risk and ambiguity. Use of this model can be extended to other applications including portfolio selection and performance measurement.
Can Idiosyncratic Cash Flow Shocks Explain Asset Pricing Anomalies? ∗ Ilona Babenko
, 2013
"... Asset pricing anomalies appear in a dynamic framework if unpriced idiosyncratic cash flow shocks contain information about future priced risk. A positive idiosyncratic shock decreases the sensitivity of firm value to priced risk factors and simultaneously increases firm size. Therefore, a model with ..."
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Cited by 1 (0 self)
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Asset pricing anomalies appear in a dynamic framework if unpriced idiosyncratic cash flow shocks contain information about future priced risk. A positive idiosyncratic shock decreases the sensitivity of firm value to priced risk factors and simultaneously increases firm size. Therefore, a model with idiosyncratic shocks can explain value and size premia, as well as the negative relation between idiosyncratic volatility and stock returns. More generally, our results imply that any economic variable correlated with the history of idiosyncratic cash flow shocks can be successful in explaining expected stock returns.
Real options and risk dynamics
 Review of Economic Studies
, 2015
"... We examine the asset pricing implications of a neoclassical model of repeated investment and disinvestment. Prior research has emphasized a negative relation between productivity and equity risk that results from operating leverage when capital adjustment is costly. In general, however, expansion an ..."
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Cited by 1 (1 self)
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We examine the asset pricing implications of a neoclassical model of repeated investment and disinvestment. Prior research has emphasized a negative relation between productivity and equity risk that results from operating leverage when capital adjustment is costly. In general, however, expansion and contraction options affect risk in the opposite direction: they lower equity risk as profitability declines. The general prediction is a nonmonotonic overlay of opposing real option and operating leverage effects. For parameters chosen to match empirical firm characteristics, the predicted nonmonotonicities are quantitatively important, and are detectable in the data. The calibrated model implies that real option effects dominate operating leverage effects, and the average firm is best described by an increasing risk profile, a conclusion supported by conditional beta estimates. The baseline calibration helps explain the profitability premium in the crosssection, but makes the value puzzle worse. Panels with heterogeneous firms can deliver simultaneous profitability and value effects that match empirical levels.