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Asset pricing at the millennium

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by John Y. Campbell
Venue:Journal of Finance
Citations:189 - 0 self
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@ARTICLE{Campbell_assetpricing,
    author = {John Y. Campbell},
    title = {Asset pricing at the millennium},
    journal = {Journal of Finance},
    year = {}
}

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Abstract

This paper surveys the field of asset pricing. The emphasis is on the interplay between theory and empirical work and on the trade-off between risk and return. Modern research seeks to understand the behavior of the stochastic discount factor ~SDF! that prices all assets in the economy. The behavior of the term structure of real interest rates restricts the conditional mean of the SDF, whereas patterns of risk premia restrict its conditional volatility and factor structure. Stylized facts about interest rates, aggregate stock prices, and cross-sectional patterns in stock returns have stimulated new research on optimal portfolio choice, intertemporal equilibrium models, and behavioral finance. This paper surveys the field of asset pricing. The emphasis is on the interplay between theory and empirical work. Theorists develop models with testable predictions; empirical researchers document “puzzles”—stylized facts that fail to fit established theories—and this stimulates the development of new theories. Such a process is part of the normal development of any science. Asset pricing, like the rest of economics, faces the special challenge that data are generated naturally rather than experimentally, and so researchers cannot control the quantity of data or the random shocks that affect the data. A particularly interesting characteristic of the asset pricing field is that these random shocks are also the subject matter of the theory. As Campbell, Lo, and MacKinlay ~1997, Chap. 1, p. 3! put it: What distinguishes financial economics is the central role that uncertainty plays in both financial theory and its empirical implementation. The starting point for every financial model is the uncertainty facing investors, and the substance of every financial model involves the impact of uncertainty on the behavior of investors and, ultimately, on mar-* Department of Economics, Harvard University, Cambridge, Massachusetts

Keyphrases

asset pricing    empirical work    financial model    random shock    new theory    interesting characteristic    testable prediction    empirical implementation    conditional mean    stochastic discount factor sdf    modern research    harvard university    central role    mar department    risk premia    subject matter    term structure    financial economics    normal development    asset pricing field    special challenge    intertemporal equilibrium model    empirical researcher document puzzle    stock return    real interest rate    interest rate    new research    uncertainty play    factor structure    conditional volatility    aggregate stock price    established theory    cross-sectional pattern    financial theory    optimal portfolio choice    behavioral finance   

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