Abstract The positive relation of returns with Book-to-Market ratio ( BE / ME ) and their negative relation withMarket Value( MVE ) remains strong under a general stochastic discount function (SDF) that does not depend on a specific asset pricing model and avoids potentially serious simultaneity biases inherent in the Fama and French three-factor model. However, we find that SDF s that include the equivalent of the HML portfolio do not span all asset sub-spaces, even with additional conditioning information. Finally, macro and financial variables we introduce to the pricing functions do not offer an alternative explanation of the BE / ME effect. JEL Classification codes: G10, G12, G15, G30.

The paper examines the allocation of consumption and investment in a three-date binomial model in order to determine the sign of the real term structure premium in general equilibrium. When production functions are concave, markets are complete, and future production possibilities are the same irrespective of which state of the world occurs, the term structure premium will be positive. In incomplete markets, constant or increasing absolute risk aversion is sufficient to guarantee a positive term structure premium, although in the (more likely) case of decreasing absolute risk aversion a negative premium cannot be ruled out.

Higher relative risk aversion is associated with higher risk premiums only if the riskiness of output is exogenous. When consumers can affect the variability of output, the market risk premium may well decrease as the relative risk aversion increases. With constant relative risk aversion and linear production functions, the ratio of the market risk premium to the standard deviation of the market is constant and independent of the relative risk aversion. Copyright 1991 by American Economic Association.

Higher relative risk aversion (RRA) is associated with higher risk premiums only if the riskiness of output is exogenous. When consumers can affect the variability of output, the market risk premium may well decrease as the RRA increases. With constant relative risk aversion and linear production functions, the ratio of the market risk premium to the standard deviation of the market is constant and independent of the RRA.

This paper examines the relation between nominal and real interest rates, and the nominal and real term structure under uncertainty. We show that two separate risk terms cause the Fisher theorem to fail. One risk term is related only to the variability of money prices, while the other is related to the purchasing power riskiness of the nominal bond. Monetary policy can affect the value of both these risk terms. We also show that the pure expectations hypothesis of the term structure fails for both real and nominal bonds because of risk premia. Even if the economy is neutral with respect to monetary policy, monetary policy can alter the nominal term structure.

This paper examines the relation between nominal and real interest rates, and the nominal and real term structure under uncertainty. We show that two separate risk terms cause the Fisher theorem to fail. One risk term is related only to the variability of money prices, while the other is related to the purchasing power riskiness of the nominal bond. Monetary policy can affect the value of both these risk terms. We also show that the pure expectations hypothesis of the term structure fails for both real and nominal bonds because of risk premia. Even if the economy is neutral with respect to monetary policy, monetary policy can alter the nominal term structure.

The law of one price (LOP) is tested for narrowly defined commodities traded in futures markets in different countries during the period 1973–80. Although the LOP holds as an average tendency for most of the commodities, there are instances of large riskless arbitrage returns (before transactions costs). Deviations from the LOP tend to be commodity specific rather than due to a common external factor and they tend to be smaller the longer the maturity of the futures contract.

ABSTRACT The law of one price (LOP) is tested for narrowly defined commodities traded in futures markets in different countries during the period 1973–80. Although the LOP holds as an average tendency for most of the commodities, there are instances of large riskless arbitrage returns (before transactions costs). Deviations from the LOP tend to be commodity specific rather than due to a common external factor and they tend to be smaller the longer the maturity of the futures contract.

Stock market returns are significantly correlated with inflation and money growth. The impact of real macroeconomic variables on aggregate equity returns has been difficult to establish, perhaps because their effects are neither linear nor time invariant. We estimate a GARCH model of daily equity returns, where realized returns and their conditional volatility depend on 17 macro series' announcements. We find six candidates for priced factors: three nominal (CPI, PPI, and a Monetary Aggregate) and three real (Balance of Trade, Employment Report, and Housing Starts). Popular measures of overall economic activity, such as Industrial Production or GNP are not represented.