Prof. Dr. Yvan Lengwiler
Prof. Dr. Heinz Zimmermann
Abteilung Wirtschaftstheorie
Abteilung Finanzmarkttheorie/Finance
Spring 2009
10202-01
Advanced Asset Pricing 6 CP
Fortgeschrittene Kapitalmarktmodelle 6 CP
Course Objective
This course provides an in-depth treatment of selected topics of advanced capital
market theory (asset pricing). The first part coveres the analytical structure of
asset pricing models, the second part focuses more on empirical issues.
a) We develop the microeconomic general equilibrium foundations of modern
asset pricing theory. In particular, we examine conditions for "easy aggregation"
and explore some of the problems when aggregation is not so easy.
b) We extend the standard one-period setting to intertemporal portfolio decisions
and equilibrium. We then analyse the structure and interrelationship between
SDF-, beta- and minimum-variance representations of asset pricing models.
c) Standard, conditional and unconditional asset pricing tests are discussed, with a
strong focus on spanning tests and their interpretation.
Prerequisites
Basic finance knowledge and some basic microeconomics background is required
to follow the course. The mathematics we use does not exceed highschool level,
except for some basic stochastics. The empirical part of the course requires some
basic knowledge in econometrics, but interest in empirical work can well
substitute lacking econometric experience.
2
Organisation
The lectures take place on Wednesdays, 0915 to 1300 (detailed schedule see behind).
Instructors:
Prof. Dr. Yvan Lengwiler, yvan.lengwiler@unibas.ch
Prof. Dr. Heinz Zimmermann, heinz.zimmermann@unibas.ch
Benjamin Brunner, M.S., b.brunner@unibas.ch
Assessment/Exams/Credits
The course is worth 6 ECTP.
For the first part there is a written exam worth 100% of the grade. For the second
part there is a final exam (worth 70% of the grade) and a homework (worth 30%).
The grade for the course is the average of the grades you achieve in both parts.
3
Outline
Part I: General equilibrium asset pricing (Y. Lengwiler)
1
2
3
4
5
6
Contingent claim economy
Financial assets in general equilibrium; Risk-neutral probabilities
Decisions under risk and the use of porbabilities in decision theory
Aggregation; SDF; C-CAPM
More on the finance economy model
Richer models: When aggregation fails
Part II: Asset Pricing Models (H. Zimmermann)
1
2
3
4
5
6
7
8
9
Intertemporal portfolio selection and hedging
Intertemporal asset pricing, and consumption
SDF approach to asset pricing
General Method of Moments (GMM)
Representation and equivalance of asset pricing models: SDF, mv, beta
Spanning tests
Pricing errors, and arbitrage pricing theory (APT)
Conditioning information: Predictability in stock and bond returns
Testing conditional asset pricing models
4
Schedule
Date
25.02
11.03
18.03
25.03
1.04
8.04
15 04
22 04
29 04
06 05
13 05
20 05
Session Topic
Nr.
1+2 (1) Contingent claim economy
3+4 (2) Financial assets in general equilibrium;
Risk-neutral probabilities
5+6 (3) Decisions under risk and the use of
porbabilities in decision theory
7+8 (4) Aggregation; SDF; C-CAPM
9+10 (5) More on the finance economy model
11+12 (6) Richer models: When aggregation fails
13
14
15
16
17
18
19
20
21
22
23
24
(1) Intertemporal portfolio selection, hedging
(2) Intertemporal asset pricing, consumption
(3) SDF approach to asset pricing
(4) Econometrics 1: GMM
(5) Representation and equivalence of APM
(5) cont.
(5) cont.
(6) Econometrics 2: Spanning tests
(7) Pricing errors, arbitrage pricing
(8) Conditioning information
(8) cont.
(9) Econometrics 3: Conditional asset pricing
Readings
5
Readings
The main texts for the course are:
a) Textbook (first 12 sessions): Lengwiler (2004). Microfoundations of
Financial Economics, Princeton University Press.
b) Textbook: John H. Cochrane (2005): Asset pricing. Princeton University
Press. Revised edition – Available at Karger Libri
c) Review Paper: Wayne E. Ferson (2003): Tests of multifactor pricing
models, volatility bounds, and portfolio performance, in: Handbook of the
Economics of Finance, Edited by G.M. Constantinides, M. Harris and R.
Stulz, Elsevier
There are alternative textbooks that cover much of the material, and you may want
to consider these for parallel study. For the theoretical part, the following is
suggested:
LeRoy/Werner (2001). Principles of Financial Economics, Cambridge
University Press. [They cover much of the non-empirical part of standard
equilibrium asset pricing theory.]
Gollier (2001). The Economics of Risk and Time, MIT Press.
Ingersoll (1987). Theory of Financial Decision Making, Rowman & Littlefield.
Merton (1990). “Capital Market Theory and the Pricing of Financial Securities”,
Chapter 11, in: Handbook of Monetary Economics, Eds. Friedman/Hahn, NorthHolland (Review).
For the empirical part of the lecture, the following texts are also useful:
Campbell/Lo/MacKinlay (1997). The Econometrics of Financial Markets,
Princeton University Press.
Ferson,W.E. (1995), “Theory and empirical testing of asset pricing models”, in: R.
Jarrow, V. Maksimovic andW.T. Ziemba, eds., Handbooks in Operations Research
and Management Science: Finance, Elsevier, pp. 145−200.
6
Literature
Some classic papers that every student must read:
Arrow (1963). “The Role of Securities in the Optimal Allocation of Risk-Bearing”,
Review of Economic Studies 31, pp. 91-96, Reprinted in Essays in the Theory of
Risk-Bearing, North-Holland, 1970.
Radner (1972). “Existence of Equilibrium of Plans, Prices, and Price Expectations
in a Sequence of Markets”, Econometrica 40 (2), pp. 289-303.
Rubinstein (1974). “An Aggregation Theorem for Securities Markets”, Journal of
Financial Economics 1, pp. 225-244.
Kimball (1990): “Precautionary savings in the small and in the large”, Econometrica
58, pp. 53-73
Lucas (1978). “Asset prices in an exchange economy”, Econometrica 46, pp. 14291445.
An extensive reading list (most items with links) can be found here:
http://www.wwz.unibas.ch/witheo/yvan/book/lit.html
1. Intertemporal portfolio selection and hedging
Ingersoll, Chapter 13 (up to p. 285; methodological basics: Chapters 12 and 16).
Duffie, Chapter 3 (parts).
Huang/Litzenberger, Chapter 7.
Merton (1990, Review), Sections 6 and 7.
Merton (1990, Book), Chapter 3.
Merton (1975). “Theory of finance from the perspective of continuous time”, Journal
of Financial and Quantitative Analysis 10, pp. 659-674 (easy reading!).
Merton (1971). “Optimum consumption and portfolio rules in a continuous-time
model”, Journal of Economc Theory 3, pp. 373-413.
Martingale-models:
Cox/Huang (1989). “Optimum consumption and portfolio policies when asset prices
follow a diffusion process”, Journal of Economic Theory 49, pp. 33-83.
Pliska (1986): "A Stochastic Calculus Model of Continuous Time Trading: Optimal
Portfolios,” Mathematics of Operations Research 11.
Eggers (2004): „Martingaleansätze in der Portfolioselektion“, Dissertation HSG
7
2a. Intertemporal asset pricing models
a) Merton’s Multi-Beta CAPM
Merton (1973). “An intertemporal capital asset pricing model”, Econometrica 41, pp.
867-80.
Ingersoll, Chapter 13 (pp. 286 to the end of the chapter).
Constantinides (1989). “Theory of Valuation: Overview”, in: Frontiers of Modern
Financial Theory, Eds. Bhattacharya/Constantinides, Rowman & Littlefield (Sections
(IV and) V).
Huang/Litzenberger, Chapter 7.
Applications:
Mayers (1972). “Nonmarketable assets and capital market equilibrium under
uncertainty”, in: Studies in the Theory of Capital Markets, Ed. Jensen, Praeger, pp.
223-248.
Williams (1977). “Capital asset prices with heterogeneous beliefs”, Journal of
Financial Economics 5, pp. 219-239.
b) Consumption-CAPM
Lucas (1978). “Asset prices in an exchange economy”, Econometrica 46, pp. 14291445.
Ingersoll, Chapter 15 (pp. 332-333).
Constantinides (1989). “Theory of Valuation: Overview”, in: Frontiers of Modern
Financial Theory, Eds. Bhattacharya/Constantinides, Rowman & Littlefield (Section
III).
Huang/Litzenberger, Chapter 7.
Blanchard/Fischer (1989). Lectures on Macroeconomics, MIT-Press (Chapter 10.1,
pp. 506-512).
Sargent (1987). “Asset prices and consumption”, Chapter 3 in: Dynamic
Macroeconomic Theory, Harvard University Press.
Beja (1971). The structure of the cost of capital under uncertainty, Review of
Economic Studies 38, pp. 359-369.
Breeden (1979). “An intertemporal asset pricing model with stochastic consumption
and investment opportunities”, Journal of Financial Economics 7, pp. 265-296.
8
Grossmann/Shiller (1982). “Consumption correlatedness and risk measurement in
economies with non-traded assets and heterogeneous information”, Journal of
Finanical Economics 10, pp. 195-210.
Rubinstein (1976). “The valuation of uncertain income streams and the valuation of
options”, Bell Journal of Economics and Management Science 7, pp. 407-425.
c) Smoothing, time-varying risk premia
Black (1990). “Mean reversion and consumption smoothing”, Review of Financial
Studies 3, pp. 107-114.
Grossman/Zhou (1996). “Equilibrium analysis of portfolio insurance”. Journal of
Finance 51, pp. 1379-1403.
d) Production
Duffie, Chapters 3 and 4.
Brock (1982). “Asset prices in a production economy”, in: The Economics of
Information and Uncertainty, Ed. McCall, University of Chicago Press, pp. 1-46.
Cox/Ingersoll/Ross (1985a). “An intertemporal general equilibrium model of asset
prices”, Econometrica 53, pp. 363-384.
Breeden (1986). “Consumption, production, inflation and interest rates: A synthesis”,
Journal of Financial Economics 16, pp. 3-39.
2b. Consumption, prudence, and asset pricing
Gollier, Chapters (15), 16, 17, 22.6
Carroll/ Kimball (1996). On the concavity of the consumption function,
Econometrica 64, pp. 981-992
Kimball (1990): “Precautionary savings in the small and in the large”, Econometrica
58, pp. 53-73
Kimball (1993): “Standard risk aversion”, Econometrica 61, pp. 589-611
Separating time and risk
Gollier, Chapter 20
Kreps/ Porteus (1978): “Temporal resolution of uncertainty and dynamic choice
theory”, Econometrica 46, pp. 185-200
Selden (1978): “A new representation of preferences over ….”, Econometrica 46, pp.
1045-1060
9
2c. Analysis of intertemporal models in a state-preference
framework
Cochrane, Chapters 9.1-9.3, 21.1 (Puzzles).
Ingersoll, Chapters (8), 10 and 15.
Huang/Litzenberger, Chapters 5 and 7.
Constantinides (1989). “Theory of Valuation: Overview”, in: Frontiers of Modern
Financial Theory, Eds. Bhattacharya/Constantinides, Rowman & Littlefield (Sections
(VI, VII) and VIII).
Merton (1990, Book), Chapter 16, especially 16.1 und 16.7.
a) Efficiency of risk allocation in intertemporal models
Gollier, Chapter 21
Breeden (1984): “Futures markets and commoditiy options: Hedging and optimality
in incomplete markets”, Journal of Economic Theory 32, pp. 275-300.
Dybvig (1988): «Inefficient dynamic portfolio strategies or how to throw away a
million dollars in the stock market», Review of Financial Studies 1, pp. 67-88.
b) Complete vs. incomplete markets
Breeden (1984). “Futures markets and commoditiy options: Hedging and optimality
in incomplete markets”, Journal of Economic Theory 32, pp. 275-300.
Duffie/Huang (1985). “Implementing Arrow-Debreu equilibria by continuous trading
of few long-lived securities”, Econometrica 53, pp. 1337-1356.
Heaton/Lucas (1996). “Evaluating the effects of incomplete markets on risk sharing
and asset pricing”, Journal of Political Economy 104, pp. 443-487.
c) Equilibrium and Arbitrage
Brennan (1979). “The pricing of contingent claims in discrete time models”, Journal
of Finance 34, pp. 73-86.
Bick (1987). On the consistency of the Black-Scholes model with a general
equilibrium framework; Journal of Financial and Quantitative Analysis 22, pp. 259275.
Bick (1990). “On viable diffusion price processes for the market portfolio”, Journal of
Finance 45, pp. 673-689.
Franke/Stapleton/Subrahmanyam (1999). “When are Options Overpriced? The
Black-Scholes Model and Alternative Characterisations of the Pricing Kernel”,
European Finance Review 3 (1), pp. 79-102.
10
He/ Leland (1993). “On Equilibrium Asset Price Processes”, Review of Financial
Studies 6, pp. 593-617.
Longstaff (1995). “Option Pricing and the Martingale Restriction”, Review of
Financial Studies 8, pp. 1091-1124.
3. SDF approach to asset pricing (SDF: Stochastic discount factor)
Cochrane (1996). “A cross-sectional test of an investment based asset pricing
model”, Journal of Political Economy 104, pp. 572-621.
Brandt (1999). “Estimating Portfolio and Consumption Choice: A Conditional Euler
Equations Approach”, Journal of Finance 54, pp. 1609-1646.
Campbell (2001). “Asset Pricing at the Millennium”, Journal of Finance 55, pp.
1515-1567.
Drobetz/Stürmer/Zimmermann (2002). “Conditional Asset Pricing in Emerging
Markets”, Swiss Journal of Statistics and Economics 138, pp. 507-526
Gallant/Hansen/Tauchen (1990). “Using Conditional Moments of Asset Payoffs to
Infer the Volatility of Intertemporal Marginal Rates of Substitution”, Journal of
Econometrics 45, pp. 141-179.
Hansen/Jagannathan (1991). “Implications of security market data for models of the
dynamic economies”, Journal of Political Economy 99, pp. 225-262.
Hansen/Singleton (1982). “Generalized Instrumental Variables Estimation of
Nonlinear Rational Expectation Models”, Econometrica 50, pp. 1269-1288.
Jagannathan/Wang (1996). “The conditional CAPM and the cross-section of
expected returns”, Journal of Finance 51, pp. 3-53.
Kasa (1997). “Consumption-based versus production-based models of international
equity markets”, Journal of International Money and Finance 16, pp. 653-680.
4. Generalized Method of Moments (GMM)
Ferson/Jagannathan (1996). “Econometric Evaluation of Asset Pricing Models”, in:
Handbook of Statistics 14, Eds. Maddala/Rao, Amsterdam: Elsevier, pp. 1-33.
Ferson/Foerster (1994). “Finite Sample Properties of the Generalized Method of
Moments in Tests of Conditional Asset Pricing Models”, Journal of Financial
Economics 36, pp. 29-55.
Ferson (1995). “Theory and Empirical Testing of Asset Pricing Models”, in:
Handbooks in OR and MS (Vol. 9, ‘Finance’), Jarrow, et.al., Amsterdam: Elsevier,
pp. 145-200.
Hansen (1982). “Large Sample Properties of Generalized Method of Moments
Estimators”, Econometrica 50, pp. 1029-1054.
11
5a. Representation and equivalence of asset pricing models: SDF,
mv, beta
Cochrane, chapters 1, 4-6, 7, 8-9
Ferson, sections 2, 3
Detailed references are provided by these two texts, so we only list a few classical
papers:
Dybvig, P., and J. Ingersoll (1982): “Mean variance theory in complete markets”,
Journal of Business 55, pp. 233−252.
Ferson,W.E., and A.F. Siegel (2002a): “Stochastic discount factor bounds with
conditioning information”, Review of Financial Studies, Review of Financial Studies
16, pp. 567-595.
Gallant, R.A., L.P. Hansen and G. Tauchen (1990): “Using the conditional
moments of asset payoffs to infer the volatility of intertemporal marginal rates of
substitution”, Journal of Econometrics 45, pp. 141−179.
Gibbons, M.R., S.A. Ross and J. Shanken (1989): “A test of the efficiency of a
given portfolio”, Econometrica 57, pp. 1121−1152.
Grinblatt, M., and S. Titman (1987): “The relation between mean-variance
efficiency and arbitrage pricing”, Journal of Business 60, pp. 97−112
Huberman, G., S.A. Kandel and R.F. Stambaugh (1987): “Mimicking portfolios
and exact arbitrage pricing”, Journal of Finance 42, pp. 1−10.
Hansen, L.P., and R. Jagannathan (1991): “Implications of security market data for
models of dynamic economies”, Journal of Political Economy 99, pp. 225−262.
Hansen, L.P., and R. Jagannathan (1997): “Assessing specification errors in
stochastic discount factor models”, Journal of Finance 52, pp. 557−590.
Hansen, L.P., and S.F. Richard (1987): “The role of conditioning information in
deducing testable restrictions implied by dynamic asset pricing models”,
Econometrica 55, pp. 587−613.
Hansen, L.P., and K. Singleton (1983): “Stochastic Consumption, Risk Aversion,
and the Temporal Asset Returns,” Journal of Political Economy 91, pp. 249-265.
Jagannathan, R., and Z. Wang (2002): “Empirical evaluation of asset pricing
models: a comparison of SDF and beta methods”, Journal of Finance 57, pp.
2337−2367.
12
Kan, R., and G. Zhou (2006): “A New Variance Bound on the Stochastic Discount
Factor“, Journal of Business 79, pp. 941-961.
MacKinlay, A.C. (1995): “Multifactor models do not explain deviations from the
CAPM”, Journal of Financial Economics 38, pp. 3−28.
Roll, R. (1977): “A critique of the asset pricing theory’s tests – part 1: On past and
potential testability of the theory”, Journal of Financial Economics 4,pp. 129−176.
Shanken, J. (1987): “Multivariate proxies and asset pricing relations: living with the
Roll critique”, Journal of Financial Economics 18, pp. 91−110.
5b. Empirical tests of unconditional models
Classic Papers:
Black/ Jensen/ Scholes (1972). ‘The Capital Asset Pricing Model: Some Empirical
Tests’, in M.C. Jensen (ed.), Studies in the Theory of Capital Markets (New York:
Praeger), pp. 79-121.
Fama/MacBeth (1973). “Risk, Return, and Equilibrium: Empirical Tests”, Journal of
Political Economy 71, pp. 607-636.
Miller/ Scholes (1972). “Rate of return in relation to risk: A reexamination of some
recent findings”, in Michael C. Jensen, ed.: Studies in the Theory of Capital Markets,
pp. 47—78 (Praeger Publishers: New York).
Gibbons/ Ross/ Shanken (1989). “A Test of the Efficiency of a Given Portfolio”,
Econometrica 57, pp. 1121–1152.
Fama/French (1992). “The Cross-Section of Expected Stock Returns”, Journal of
Finance 47, pp. 427-465.
Other Papers:
Lakonishok/Shleifer/Vishny (1994). “Contrarian Investment, Extrapolation, and
Risk”, Journal of Finance 49, pp. 1541-1578.
Chan/Lakonishok (1993). “Are the Reports of Beta’s Death Premature? ”, Journal of
Portfolio Management 19, pp. 51-62.
Chan/Hamao/Lakonishok (1991). “Fundamentals and Stock Returns in Japan”,
Journal of Finance 46, pp. 1739-1764.
Chen/Roll/Ross (1986). “Economic forces and the stock market”, Journal of Business
59, pp. 383-403.
Daniel/Titman (1997). “Evidence on the characteristics of cross-sectional variation in
stock returns”, Journal of Finance 52, pp. 1-33.
Fama (1981). “Stock returns, real activity, inflation, and money”, American
Economic Review 71, pp. 545-565.
13
Fama (1990). “Stock Returns, Expected Returns, and Real Activity”, Journal of
Finance 45, pp. 1089-1108.
Fama (1991). “Efficient Capital Markets: II”, Journal of Finance 46, pp. 1575-1618.
Fama/French (1993). “Common factors in the returns on stocks and bonds”, Journal
of Financial Economics 33, pp. 3-56.
Fama/French (1996). “Multifactor Explanations of Asset Pricing Anomalies”,
Journal of Finance 51, pp. 55-84.
Fama/French (1998). “Value versus Growth: The International Evidence”, Journal of
Finance 53, pp. 1975-1999.
Fama/Schwert (1977). “Asset returns and inflation”, Journal of Financial Economics
5, pp. 115-146.
Ferson/Harvey (1994). “Sources of risk and expected returns in global equity
markets”, Journal of Banking and Finance 18, pp. 775-803.
Ferson/Harvey (1999). “Conditioning Variables and the Cross Section of Stock
Returns”, Journal of Finance 54, pp. 1325-1360.
Ferson/Sarkissian/Simin (1999). “The alpha factor asset pricing model: A parable”,
Journal of Financial Markets 2, pp. 49-68.
Hardouvelis/Kim/Wizman (1996). “Asset pricing models with and without
consumption data: An empirical evaluation”, Journal of Empirical Finance 3, pp. 267301.
Heston/Rouwenhorst/Wessels (1999). “The role of size and beta in the cross-section
of European stock returns”, European Financial Management 4, pp. 4-28.
MacKinlay (1995). “Multifactor models do not explain deviations from the CAPM”,
Journal of Financial Economics 38, pp. 3–28.
Roll/Ross (1980). “An Empirical Investigation of the Arbitrage Pricing Theory”,
Journal of Finance 35, pp. 1073-1103.
Roll/Ross (1994). “On the Cross-Sectional Relation between Expected Returns and
Betas”, Journal of Finance 49, pp. 101-122.
Shanken (1992). “On the Estimation of Beta-Pricing Models”, Review of Financial
Studies 5, pp. 1-34.
Treynor/ Black (1973). “How to use security analysis to improve portfolio
selection”, Journal of Business 46, pp. 66–86.
6. Spanning Tests
Useful review papers:
DeRoon/ Nijman (2001). “Testing for mean-variance spanning: a survey”, Journal of
Empirical Finance 8, pp. 111–155
14
Kan/ Zhou (2001). “Tests of Mean-Variance Spanning”, Working Paper
Important papers:
Bekaert/ Urias (1996), “Diversification, integration and emerging market closed-end
funds”, Journal of Finance 51, pp. 835–869.
Huberman/ Kandel (1987). “Mean-variance spanning”, Journal of Finance 42, pp.
873–888.
Jobson/ Korkie (1989). “A performance interpretation of multivariate tests of
intersection, spanning and asset pricing”, Journal of Financial and Quantitative
Analysis 24, pp. 185–204
Ferson/ Schadt (1993). „General tests of latent variable models and mean-variance
spanning”, Journal of Finance 48, pp. 131–156.
Ferson/ Schadt (1996). „Measuring funds strategy and performance in changing
economic conditions”, Journal of Finance 51, pp. 25–462.
Applications (mostly based on HJ bounds):
Errunza/Hogan/Hung (1999). “Can the Gains from International Diversification Be
Achieved without Trading Abroad?”, Journal of Finance 54, pp. 2075-2107.
Bekaert/Urias (1997). “Is There a Free Lunch in Emerging Market Investing?”,
Working paper, Stanford University.
Burnside (1994). “Hansen-Jagannathan bounds as classical test of asset-pricing
models”, Journal of Business and Economic Statistics 12, pp. 57-79.
Checcetti/Lam/Mark (1994). “Testing Volatility Restrictions on Intertemporal
Marginal Rates of Substitution Implied by the Euler Equations and Asset Returns”,
Journal of Finance 49, pp. 123-152.
Chen/Knez (1995). “Measurement of Market Integration and Arbitrage”, Review of
Financial Studies 8, pp. 287-326.
De Roon/Nijman/Werker (1988). “Testing for Spanning Futures Contracts and
Nontraded Assets”, Working paper, Tilburg University.
De Santis (1995). “Volatility Bounds for Stochastic Discount Factors: Tests and
Implications from International Financial Markets”, Working paper, University of
Southern California.
Snow (1991). “Diagnosing Asset Pricing Models using the Distribution of Asset
Returns”, Journal of Finance 46, pp. 955-983.
7. Pricing errors and APT
15
Cochrane, Chapter 9.4-9.5.
Ingersoll, Chapters (2) and 7.
Constantinides (1989). “Theory of Valuation: Overview”, in: Frontiers of Modern
Financial Theory, Eds. Bhattacharya/Constantinides, Rowman & Littlefield (Sections
(VI and VII).
Hansen/Jagannathan (1997). “Assessing specification errors in stochastic discount
factor models”, Journal of Finance 52, pp. 557-590.
Huang/ Litzenberger, Chapter 8.
Ross (1976). “The arbitrage pricing of capital asset pricing”, Journal of Economic
Theory 13, pp. 341-360.
Ross (1978). “A simple approach to the valuation of risky streams”, Journal of
Business 51, pp. 453-475.
Huberman (1983), “A simple approach to APT”, Journal of Economic Theory 28,
pp. 1183-1191.
8. Conditioning information: Predictability of stock and bond
returns
Cochrane (1999). “New Facts in Finance”, Economic Perspectives, pp. 36-58.
Fama/French (1989) “Business conditions and expected returns on stocks and
bonds”, Journal of Financial Economics 25, pp. 23-49.
Barro (1990). “The stock market and investment”, Review of Financial Studies 3, pp.
115-131.
Hansen/Richard (1987). “The role of conditioning information deducing testable
restrictions implied by dynamic asset pricing models”, Econometrica 55, pp. 12691286.
Balvers/Cosimano/McDonald (1990). “Predicting Stock Returns in an Efficient
Market”, Journal of Finance 45, pp. 1109-1128.
Balvers/Wu/Gilliand (2000). “Mean Reversion Across National Stock Markets and
Parametric Contrarian Investment Strategies”, Journal of Finance 55, pp. 745-772.
Black (1990). “Equilibrium exchange rate hedging”, Journal of Finance 45, pp. 899907.
Bossaerts/Hillion (1999). “Implementing Statistical Criteria to Select Return
Forecasting Models: What Do We Learn”, Review of Financial Studies 12, pp. 405428.
Campbell (1999). “Asset Prices, Consumption, and the Business Cycle”, in:
Handbook of Macroeconomics, Eds. Taylor/Woodford, Vol.1, Amsterdam: NorthHolland, pp. 1231-1303.
16
Campbell/Hamao (1992). “Predictable bond and stock returns in the United States
and Japan: A study of long-term capital market integration”, Journal of Finance 47,
pp. 43-69.
Campbell/Shiller (1988). “The dividend-price ratio and expectations of future
dividends and discount factors”, Review of Financial Studies 1, pp. 195-228.
Campbell/Shiller (1988). “Stock Prices, Earnings, and Expected Dividends”, Journal
of Finance 43, pp. 661-676.
Checcetti/Lam/Mark (1990). “Mean Reversion in Equilibrium Asset Prices”,
American Economic Review 80, pp. 398-418.
Checcetti/Lam/Mark (1993). “The Equity Premium and the Risk-free Rate:
Matching the Moments”, Journal of Monetary Economics 31, pp. 21-46.
Chen (1991). “Financial investment opportunities and the macroeconomy”, Journal of
Finance 46, pp. 529-555.
Cheung/He/Ng (1997). “What Are the Global Sources of Rational Variation in
International Equity Returns? ”, Journal of International Money and Finance 16, pp.
821-836.
Cochrane (1991). “Explaining the variance of price-dividend ratios”, Review of
Financial Studies 15, pp. 243-280.
Estrella/Hardouvelis (1991). “The Term Structure as a Predictor of Real Economic
Activity”, Journal of Finance 46, pp. 555-576.
Fama/French (1988). “Permanent and Temporary Components of Stock Prices”,
Journal of Political Economy 96, pp. 246-273.
Fama/French (1988). “Dividend Yields and Expected Stock Returns”, Journal of
Financial Economics 22, pp. 3-27.
Ferson/Harvey (1999). “Conditioning Variables and the Cross Section of Stock
Returns”, Journal of Finance 54, pp. 1325-1360.
Ferson/Heuson/Su (1999). “How much do Expected Stock Returns Vary over Time?
Answers from the Option Markets”, Working paper, University of Washington.
Foster/Smith/Whaley (1997). “Assessing Goodness-of-Fit of Asset Pricing Models:
The Distribution of the Maximal R2”, Journal of Finance 52, pp. 591-607.
Harvey (1991). “The term structure and world economic growth”, Journal of Fixed
Income, pp. 7-19.
Harvey (1991). “The specification of conditional expectations”, Working paper,
Duke University.
Hawawini/Keim (1995). “On the Predictability of Common Stock Returns: WorldWide Evidence”, in: Handbooks in OR and MS (Vol. 9, ‘Finance’), Jarrow, et.al.,
Amsterdam: Elsevier, pp. 497-544.
Keim/Stambaugh (1986). “Predicting returns in the stock and bond markets”, Journal
of Financial Economics 17, pp. 358-390.
Kirby (1998). “The Restrictions on Predictability Implied by Rational Asset Pricing
Models”, Review of Financial Studies 11, pp. 343-382.
17
Liew/Vassalou (2000). “Can book-to-market, size, and momentum be risk factors that
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