The dynamic nonmyopic portfolio behavior of an investor who trades a risk-free and risky asset is derived for all HARA utility functions and a stochastic risk premium. Conditions are found for when the investor holds more or less than the myopic amount of the risky asset; hedges against or speculates the risk-premium uncertainty; is long or short on the risky asset; and holds more or less of the risky asset at longer horizons. The analytical solutions derived take multiple mathematical forms and include extreme cases in which investors with long but finite horizons can attain nirvana.

[The dynamic nonmyopic portfolio behavior of an investor who trades a risk-free and risky asset is derived for all HARA utility functions and a stochastic risk premium. Conditions are found for when the investor holds more or less than the myopic amount of the risky asset; hedges against or speculates the risk-premium uncertainty; is long or short on the risky asset; and holds more or less of the risky asset at longer horizons. The analytical solutions derived take multiple mathematical forms and include extreme cases in which investors with long but finite horizons can attain nirvana.]

We examine whether time-variation in the profitability of momentum strategies is related to variation in macroeconomic conditions. We find reliable evidence that the momentum strategy exposes investors to greater downside risk. Momentum strategies deliver economically large and statistically reliable negative profits in bad economic states when the expected market risk premium is high, whereas positive profits in good economic states when the expected market risk premium is low. Our results are robust to alternative constructions of momentum portfolios, out-of-sample estimation of the expected market risk premium, and after controlling for the January effect, lagged market return, and investor sentiment.

This paper examines the relative risk of good-news firms, i.e., those with high standardized unexpected earnings (SUE), and bad-news (low SUE) firms using a stochastic discount factor approach. We find that a stochastic discount factor constructed from a set of basis assets helps explain post-earnings-announcement drift (PEAD). The risk exposures on the pricing kernel increase monotonically from the lowest to highest SUE sorted portfolios. Specifically, good-news firms always have higher risk exposures than bad-news firms in both 10 SUE sorted portfolios and 25 size and SUE sorted portfolios. However, the estimated expected risk premium is too small to explain the observed magnitude of returns on the PEAD strategy. Our risk adjustment can explain only about one-fourth of the total magnitude of the average realized return to the PEAD strategy. As a result, the average risk-adjusted returns of earnings momentum strategies are mostly positive and significant. Overall, our results support the view that at least some portion of the returns to the earnings momentum strategies examined represent compensation for bearing increased risk.

This paper examines the equilibrium relation between future labor income growth and expected asset returns; it proposes revisions in the expectation of future labor income growth as a macroeconomic state variable and suggests a three-factor model, including a factor related to this variable, along with the consumption growth factor and the market factor. The proposed future labor income growth factor is positively associated with the Fama–French factors and subsumes their explanatory power in explaining the cross-section of stock returns. These results provide a possible economic explanation for the roles of the Fama–French factors: they are compensation for higher exposure to the risk related to changes in the value of human capital. This paper also compares the performance of the proposed three-factor model with other competing models and finds that the proposed model specification better captures cross-sectional variation in average returns than any of the competing asset pricing models considered.

This paper reexamines, at a range of investment horizons, the asymmetric dependence between hedge fund returns and market returns. Given the current availability of hedge fund data, the joint distribution of longer-horizon returns is extracted from the dynamics of monthly returns using the filtered historical simulation; we then apply the method based on copula theory to uncover the dependence structure therein. While the direction of asymmetry remains unchanged, the magnitude of asymmetry is attenuated considerably as the investment horizon increases. Similar horizon effects also occur on the tail dependence. Our findings suggest that nonlinearity in hedge fund exposure to market risk is more short term in nature, and that hedge funds provide higher benefits of diversification, the longer the horizon.

This paper examines the impact of both socially responsible (SR) and conventional entrant funds on SR incumbent funds using an overlap in portfolio holdings to measure the impact of competition in the US mutual fund industry. This paper’s findings indicate that over the past decade the increase in competition from SR entrants has been associated with an increase in fees but not in capital flow. Moreover, our results show that the increase in the number of SR fund entrants does not have a negative impact on fund performance. This finding implies that despite the significant increase in the number of SR funds entering the market, open and free competition fosters the performance of SR fund participants. Our study concludes that despite the recent growth in the number of SR funds, the SR mutual fund market does not exhibit the key features of a competitive market.

We develop a conditional version of the consumption capital asset pricing model (CCAPM) using the conditioning variable from the cointegrating relation among macroeconomic variables (dividend yield, term spread, default spread, and short-term interest rate). Our conditioning variable has a strong power to predict market excess returns in the presence of competing predictive variables. In addition, our conditional CCAPM performs approximately as well as Fama and French’s (1993) three-factor model in explaining the cross-section of the Fama and French 25 size and book-to-market sorted portfolios. Our specification shows that value stocks are riskier than growth stocks in bad times, supporting the risk-based story.