Knowledge that Transforms

Subscription Page Get access The Review of Asset Pricing Studies, Volume 3, Issue 1, June 2013, Page i3, https://doi.org/10.1093/rapstu/ras022 Published: 03 May 2013

Journal Article Subscription Page Get access The Review of Asset Pricing Studies, Volume 3, Issue 2, December 2013, Page i3, https://doi.org/10.1093/rapstu/ras023 Published: 11 November 2013

The Review of Asset Pricing Studies (the RAPS) is ending its third year as a publishing journal, and now is a good time to talk about how we are doing and to review the state of our new journal. We are doing well. You, our authors, are submitting high quality papers, and you, our referees, are writing high quality reviews. Some of the world’s leading scholars serve on our editorial board. Oxford University Press, our publisher, is producing great looking volumes and managing various web-based forums for our journal’s dissemination. The Society of Financial Studies (SFS), which owns three journals including the RAPS, has been very supportive as well. None of this surprises me. When I agreed to be the first Editor of the new journal I knew that I would be working with top quality people and organizations. But, there have been some surprises. One surprise is that the...

To what extent does TF, the target Federal funds rate set by the Fed, influence other rates? There is lots of variation in rates unrelated to TF, and any effects of TF on rates dissipate quickly for longer maturities. For short rates, all the tests have interpretations in terms of: (i) a Fed that has the power to control rates and uses it, and (ii) a Fed that has little power over rates or chooses not to exercise its power. In the end, there is no conclusive evidence (here or elsewhere) on the role of the Fed versus market forces in the long-term path of interest rates.

We construct a panel of S&P 500 Index call and put option portfolios, daily adjusted to maintain targeted maturity, moneyness, and unit market beta, and test multi-factor pricing models. The standard linear factor methodology is applicable because the monthly portfolio returns have low skewness and are close to normal. We hypothesize that any one of crisis-related factors incorporating price jumps, volatility jumps, and liquidity (along with the market) explains the cross-sectional variation in returns. Our hypothesis is not rejected, even when the factor premia are constrained to equal the corresponding premia in the cross-section of equities. The alphas of short-maturity out-of-the-money puts become economically and statistically insignificant.

For sophisticated institutional investors, active management outperforms passive management by more than 180 bps per year in emerging markets and by about 50 bps in EAFE markets over the 1993 to 2008 period. In U.S. markets, active management underperforms. Consistent with these patterns in returns, institutions use active management more frequently in non-U.S. markets, particularly emerging markets. Finally, we provide some evidence that one contributor to the active outperformance is institutional constraints on flows to non-U.S. markets. Overall, our results suggest that the value of active management depends on the efficiency of the underlying market and the sophistication of the investor.

By introducing a labor market into the neoclassical asset pricing model, limited capital market participation can be an equilibrium outcome. Labor contracts are derived endogenously as part of a dynamic equilibrium in a production economy. Firms write labor contracts that insure workers, allowing agents to achieve a Pareto optimal allocation even when the span of asset markets is restricted to just stocks and bonds. Capital markets facilitate this risk sharing because it is there that firms offload the labor market risk they assumed from workers. In effect, by investing in capital markets, investors provide insurance to wage earners who then optimally choose not to participate in capital markets.

We derive new estimates of total wealth, the returns on total wealth, and the wealth effect on consumption. We estimate the prices of aggregate risk from bond yields and stock returns using a no-arbitrage model. Using these risk prices, we compute total wealth as the price of a claim to aggregate consumption. We find that U.S. households have a surprising amount of total wealth, most of it human wealth. This wealth is much less risky than stock market wealth. Events in long-term bond markets, not stock markets, drive most total wealth fluctuations. The wealth effect on consumption is small and varies over time with real interest rates.

We show that the stock market downturns of 2000–2002 and 2007–2009 have very different proximate causes. The early 2000s saw a large increase in the discount rates applied to profits by rational investors, while the late 2000s saw a decrease in rational expectations of future profits. We reach these conclusions by using a VAR model of aggregate stock returns and valuations, estimated both without restrictions and imposing the cross-sectional restrictions of the intertemporal capital asset pricing model (ICAPM). Our findings imply that the 2007–2009 downturn was particularly serious for rational long-term investors, whose losses were not offset by improving stock return forecasts as in the previous recession.

This paper analyzes the Amihud (2002) measure of illiquidity and its role in asset pricing. It is shown first that the effect of illiquidity on asset pricing is clarified by using the turnover version of the Amihud measure and including firm size as a separate variable. When we decompose the Amihud measure into elements that correspond to positive (up) and negative (down) return days, we find that in general, only the down-day element commands a return premium. Further analysis of the up- and down-day elements using order flows shows that a sidedness variable, which captures the tendency for orders to cluster on the sell side on down days, is associated with a more significant return premium than the other components of the Amihud measure.