Download or read book Firm Characteristics Covariances and Cross sectional Expected Returns written by Pengqin Gao and published by . This book was released on 2010 with total page 159 pages. Available in PDF, EPUB and Kindle. Book excerpt: I investigate the relationship among firm characteristics, conditional covariance structure of stock returns, and cross-sectional expected returns. In the first chapter of my dissertation, I explore the (abnormal) return covariance pattern of S & P 500 stocks. Their covariance pattern, without being associated with any common factors, is explicitly linked to firm characteristics such as size, momentum, and accounting-based fundamentals. I propose a new covariance estimator based on this observation. In comparison to factor-based covariance models, a characteristic-based covariance model brings substantial diversification benefits and utility gains for a risk-averse investor seeking a global minimum variance portfolio and an optimal tangency portfolio, respectively.
Download or read book Firm Characteristics and the Cross Section of Covariance Risk written by Chris Kirby and published by . This book was released on 2018 with total page 53 pages. Available in PDF, EPUB and Kindle. Book excerpt: I analyze the cross-section of covariance risk for individual stocks using a new type of multivariate volatility model in which firm characteristics serve as time-varying loadings on fundamental factors. The evidence points to strong linkages between firm characteristics and covariance risk, and also reveals that cross-sectional differences in covariance risk explain much of the cross-sectional variation in expected excess stock returns. I find, for example, that the fundamental factors perform at least as well as the Fama-French factors in regression-based pricing tests. In view of its tractability and performance, the proposed model should find use in a variety of applications.
Download or read book DIY Financial Advisor written by Wesley R. Gray and published by John Wiley & Sons. This book was released on 2015-08-31 with total page 230 pages. Available in PDF, EPUB and Kindle. Book excerpt: DIY Financial Advisor: A Simple Solution to Build and Protect Your Wealth DIY Financial Advisor is a synopsis of our research findings developed while serving as a consultant and asset manager for family offices. By way of background, a family office is a company, or group of people, who manage the wealth a family has gained over generations. The term 'family office' has an element of cachet, and even mystique, because it is usually associated with the mega-wealthy. However, practically speaking, virtually any family that manages its investments—independent of the size of the investment pool—could be considered a family office. The difference is mainly semantic. DIY Financial Advisor outlines a step-by-step process through which investors can take control of their hard-earned wealth and manage their own family office. Our research indicates that what matters in investing are minimizing psychology traps and managing fees and taxes. These simple concepts apply to all families, not just the ultra-wealthy. But can—or should—we be managing our own wealth? Our natural inclination is to succumb to the challenge of portfolio management and let an 'expert' deal with the problem. For a variety of reasons we discuss in this book, we should resist the gut reaction to hire experts. We suggest that investors maintain direct control, or at least a thorough understanding, of how their hard-earned wealth is managed. Our book is meant to be an educational journey that slowly builds confidence in one's own ability to manage a portfolio. We end our book with a potential solution that could be applicable to a wide-variety of investors, from the ultra-high net worth to middle class individuals, all of whom are focused on similar goals of preserving and growing their capital over time. DIY Financial Advisor is a unique resource. This book is the only comprehensive guide to implementing simple quantitative models that can beat the experts. And it comes at the perfect time, as the investment industry is undergoing a significant shift due in part to the use of automated investment strategies that do not require a financial advisor's involvement. DIY Financial Advisor is an essential text that guides you in making your money work for you—not for someone else!
Download or read book Expected Returns written by Flavio Nardi and published by . This book was released on 2018 with total page 22 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper, I utilize cross--sectional weighted least square regressions to extract market value weighted zero--cost portfolios that are based on firm characteristics from both individual firm excess returns and risk--adjusted excess returns. The analysis shows that the value weighted size and book--to--market cross--sectional regression zero--cost portfolios have effectively the same explanatory power as the Fama French 3 factor model constructed from portfolio sorts. I compare their performance using the Fama French 25 size and book--to--market portfolios as test assets, and present evidence that the zero--cost portfolios extracted from cross--sectional regressions of risk--adjusted excess returns on firm characteristics do not have any significant explanatory power when tested on the combined Fama French 25 size and book--to--market and 30 industry portfolios. This empirical finiding implies that individual firm risk--adjusted returns do not exhibit any statistically significant cross--sectional difference related to firm characteristics.Consistent with such interpretation, the risk--adjusted value weighted cross--sectional factors have very low correlation with the original Fama French 3 factors. Moreover, this empirical result provides suggestive evidence that risk adjustment of excess returns is effective in capturing the cross--sectional difference in firms' expected returns. Finally, I perform a formal time series test to compare the cross-sectional regression factors based on excess returns and risk--adjusted excess returns; I conclude that there is very little correlation between the two, indicating that loadings on the factors capture the cross--section of expected returns.
Download or read book Evidence on the Characteristics of Cross Sectional Variation in Stock Returns written by Kent D. Daniel and published by . This book was released on 2008 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt: Firm size and book-to-market ratios are both highly correlated with the returns of common stocks. Fama and French (1993) have argued that the association between these firm characteristics and their stock returns arises because size and book-to-market ratios are proxies for non-diversifiable factor risk. In contrast, the evidence in this paper indicates that the return premia on small capitalization and high book-to-market stocks does not arise because of the co-movements of these stocks with pervasive factors. It is the firm characteristics and not the covariance structure of returns that explain the cross-sectional variation in stock returns.
Download or read book Evidence on the Characteristics of Cross Sectional Variation in Stock Returns written by and published by . This book was released on 1996 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: Abstract: Firm size and book-to-market ratios are both highly correlated with the returns of common stocks. Fama and French (1993) have argued that the association between these firm characteristics and their stock returns arises because size and book-to-market ratios are proxies for non-diversifiable factor risk. In contrast, the evidence in this paper indicates that the return premia on small capitalization and high book-to-market stocks does not arise because of the co-movements of these stocks with pervasive factors. It is the firm characteristics and not the covariance structure of returns that explain the cross-sectional variation in stock returns.
Download or read book Aggregation of Information About the Cross Section of Stock Returns written by Nathaniel Light and published by . This book was released on 2017 with total page 70 pages. Available in PDF, EPUB and Kindle. Book excerpt: We propose a new approach for estimating expected returns on individual stocks from a large number of firm characteristics. We treat expected returns as latent variables and apply the partial least squares (PLS) estimator that filters them out from the characteristics under an assumption that the characteristics are linked to expected returns through one or few common latent factors. The estimates of expected returns constructed by our approach from twenty six firm characteristics generate a wide cross-sectional dispersion of realized returns and outperform estimates obtained by alternative techniques. Our results also provide evidence of commonality in asset pricing anomalies.
Download or read book Parametric Portfolio Policies written by Michael W. Brandt and published by . This book was released on 2004 with total page 68 pages. Available in PDF, EPUB and Kindle. Book excerpt: "We propose a novel approach to optimizing portfolios with large numbers of assets. We model directly the portfolio weight in each asset as a function of the asset's characteristics. The coefficients of this function are found by optimizing the investor's average utility of the portfolio's return over the sample period. Our approach is computationally simple, easily modified and extended, produces sensible portfolio weights, and offers robust performance in and out of sample. In contrast, the traditional approach of first modeling the joint distribution of returns and then solving for the corresponding optimal portfolio weights is not only difficult to implement for a large number of assets but also yields notoriously noisy and unstable results. Our approach also provides a new test of the portfolio choice implications of equilibrium asset pricing models. We present an empirical implementation for the universe of all stocks in the CRSP-Compustat dataset, exploiting the size, value, and momentum anomalies"--National Bureau of Economic Research web site.
Download or read book Firm Characteristics Industry Horizon and Time Effects in the Cross Section of Expected Stock Returns written by Rob Bauer and published by . This book was released on 2009 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt: We construct a panel data model to explain the cross-section of individual stock returns, using monthly data for 1,880 large US firms for 1985-2005. Model specification is geared towards multiple explanatory variables, poolability across industries, alternative forecast horizons, and the effects of unobserved heterogeneity among firms. We find that combining multiple firm characteristics increases the predictive power. High expected returns are mostly related to size, cashflow-to-price and turnover, and somewhat to earnings revisions and momentum. Diversified portfolios sorted on expected returns have moderate risk exposures and generate significant risk-adjusted returns over all horizons. Longer forecasting horizons drastically reduce portfolio turnover and hence lower costs.
Download or read book The Level Slope and Curve Factor Model for Stocks Evidence Theory and Explanation written by Charles Clarke and published by . This book was released on 2016 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The reported number of firm characteristics that predict stock returns is growing at a rapid pace. This dissertation offers a reorganization of this exploding space. In the first chapter, I use regressions to aggregate the explanatory power of many anomalies into one proxy for expected returns. I find that sorting on this proxy creates large spreads in average returns and large alphas when compared to the leading factor models. The procedure allows me to evaluate the marginal economic significance of each anomaly. Asset growth, net stock issues and momentum are the strongest anomaly variables. Anomaly importance varies across size groups, but size provides relatively little explanatory power. I use principal components analysis to show that a strong multifactor structure underlies the spreads created from my one dimensional sort. In the second chapter, I develop a method to extract only the priced factors from stock returns. The first step estimates expected returns based on characteristics. The second uses the expected returns to form portfolios. The last step uses principal components to extract factors from the portfolio returns. The procedure isolates and emphasizes the comovement across assets that is related to expected returns as opposed to firm characteristics. It produces three factors--level, slope and curve--which perform as well or better than other leading models. Horse races show that other leading factors add little to the model. The factors have macroeconomic risk interpretations. The third chapter reevaluates the Consumption Capital Asset Pricing Model's ability to price the cross-section of stocks. With a few adjustments that generate more informative tests by increasing test power, I find that the simple linearized CCAPM often matches key features of the cross-section: the consumption risk premium is positive and significant, the zero beta rate is near zero and insignificant, and the CCAPM captures much of the variation across average portfolio returns. A key stylized fact emerges that many interesting ``anomalies'' share the characteristic that high expected return portfolios tend to have higher covariance with consumption.
Download or read book Share Repurchases written by Theo Vermaelen and published by Now Publishers Inc. This book was released on 2005 with total page 117 pages. Available in PDF, EPUB and Kindle. Book excerpt: This survey derives some of the key results on the taxation of international investment in variants of one model of multinational investment.
Download or read book Empirical Asset Pricing written by Wayne Ferson and published by MIT Press. This book was released on 2019-03-12 with total page 497 pages. Available in PDF, EPUB and Kindle. Book excerpt: An introduction to the theory and methods of empirical asset pricing, integrating classical foundations with recent developments. This book offers a comprehensive advanced introduction to asset pricing, the study of models for the prices and returns of various securities. The focus is empirical, emphasizing how the models relate to the data. The book offers a uniquely integrated treatment, combining classical foundations with more recent developments in the literature and relating some of the material to applications in investment management. It covers the theory of empirical asset pricing, the main empirical methods, and a range of applied topics. The book introduces the theory of empirical asset pricing through three main paradigms: mean variance analysis, stochastic discount factors, and beta pricing models. It describes empirical methods, beginning with the generalized method of moments (GMM) and viewing other methods as special cases of GMM; offers a comprehensive review of fund performance evaluation; and presents selected applied topics, including a substantial chapter on predictability in asset markets that covers predicting the level of returns, volatility and higher moments, and predicting cross-sectional differences in returns. Other chapters cover production-based asset pricing, long-run risk models, the Campbell-Shiller approximation, the debate on covariance versus characteristics, and the relation of volatility to the cross-section of stock returns. An extensive reference section captures the current state of the field. The book is intended for use by graduate students in finance and economics; it can also serve as a reference for professionals.
Download or read book Empirical Asset Pricing written by Turan G. Bali and published by John Wiley & Sons. This book was released on 2016-02-26 with total page 512 pages. Available in PDF, EPUB and Kindle. Book excerpt: “Bali, Engle, and Murray have produced a highly accessible introduction to the techniques and evidence of modern empirical asset pricing. This book should be read and absorbed by every serious student of the field, academic and professional.” Eugene Fama, Robert R. McCormick Distinguished Service Professor of Finance, University of Chicago and 2013 Nobel Laureate in Economic Sciences “The empirical analysis of the cross-section of stock returns is a monumental achievement of half a century of finance research. Both the established facts and the methods used to discover them have subtle complexities that can mislead casual observers and novice researchers. Bali, Engle, and Murray’s clear and careful guide to these issues provides a firm foundation for future discoveries.” John Campbell, Morton L. and Carole S. Olshan Professor of Economics, Harvard University “Bali, Engle, and Murray provide clear and accessible descriptions of many of the most important empirical techniques and results in asset pricing.” Kenneth R. French, Roth Family Distinguished Professor of Finance, Tuck School of Business, Dartmouth College “This exciting new book presents a thorough review of what we know about the cross-section of stock returns. Given its comprehensive nature, systematic approach, and easy-to-understand language, the book is a valuable resource for any introductory PhD class in empirical asset pricing.” Lubos Pastor, Charles P. McQuaid Professor of Finance, University of Chicago Empirical Asset Pricing: The Cross Section of Stock Returns is a comprehensive overview of the most important findings of empirical asset pricing research. The book begins with thorough expositions of the most prevalent econometric techniques with in-depth discussions of the implementation and interpretation of results illustrated through detailed examples. The second half of the book applies these techniques to demonstrate the most salient patterns observed in stock returns. The phenomena documented form the basis for a range of investment strategies as well as the foundations of contemporary empirical asset pricing research. Empirical Asset Pricing: The Cross Section of Stock Returns also includes: Discussions on the driving forces behind the patterns observed in the stock market An extensive set of results that serve as a reference for practitioners and academics alike Numerous references to both contemporary and foundational research articles Empirical Asset Pricing: The Cross Section of Stock Returns is an ideal textbook for graduate-level courses in asset pricing and portfolio management. The book is also an indispensable reference for researchers and practitioners in finance and economics. Turan G. Bali, PhD, is the Robert Parker Chair Professor of Finance in the McDonough School of Business at Georgetown University. The recipient of the 2014 Jack Treynor prize, he is the coauthor of Mathematical Methods for Finance: Tools for Asset and Risk Management, also published by Wiley. Robert F. Engle, PhD, is the Michael Armellino Professor of Finance in the Stern School of Business at New York University. He is the 2003 Nobel Laureate in Economic Sciences, Director of the New York University Stern Volatility Institute, and co-founding President of the Society for Financial Econometrics. Scott Murray, PhD, is an Assistant Professor in the Department of Finance in the J. Mack Robinson College of Business at Georgia State University. He is the recipient of the 2014 Jack Treynor prize.
Download or read book A Theory of Firm Characteristics and Stock Returns The Role of Investment Specific Shocks written by and published by . This book was released on 2012 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Measuring Cross sectional Variation in Expected Returns written by Douglas Jean Laporte and published by . This book was released on 2023 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: I develop and test a new machine learning method for estimating cross-sectional firm-level expected returns. My approach adapts the loss function of a random forest algorithm to minimize the variance of measurement errors instead of trading off bias and variance. Out-of-sample tests show this approach yields reliably higher cross-sectional accuracy relative to: (a) commonly used implied cost of capital estimates, (b) factor-based estimates, and (c) estimates based on other state-of-the-art machine learning algorithms. In more detailed analyses, I find that while a small number of firm characteristics explain most of the returns predictability, the relative importance of these characteristics vary by holding horizon. Further, cross-sectional differences in expected returns exhibit limited persistence beyond two years. I also use this new approach to revisit the reported association between earnings smoothness and expected returns. Contrary to prior studies, I show that firms whose earnings are smoother relative to their cash flows earn higher (not lower) expected returns, despite being safer on many dimensions.
Download or read book Artificial Intelligence in Asset Management written by Söhnke M. Bartram and published by CFA Institute Research Foundation. This book was released on 2020-08-28 with total page 95 pages. Available in PDF, EPUB and Kindle. Book excerpt: Artificial intelligence (AI) has grown in presence in asset management and has revolutionized the sector in many ways. It has improved portfolio management, trading, and risk management practices by increasing efficiency, accuracy, and compliance. In particular, AI techniques help construct portfolios based on more accurate risk and return forecasts and more complex constraints. Trading algorithms use AI to devise novel trading signals and execute trades with lower transaction costs. AI also improves risk modeling and forecasting by generating insights from new data sources. Finally, robo-advisors owe a large part of their success to AI techniques. Yet the use of AI can also create new risks and challenges, such as those resulting from model opacity, complexity, and reliance on data integrity.
Download or read book Financial Markets and the Real Economy written by John H. Cochrane and published by Now Publishers Inc. This book was released on 2005 with total page 117 pages. Available in PDF, EPUB and Kindle. Book excerpt: Financial Markets and the Real Economy reviews the current academic literature on the macroeconomics of finance.
