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We show that when investors review their consumption and investment plans infrequently at different points in time with interim information flows, the standard consumption-based capital asset pricing model (CCAPM) will continue to hold only at those points in time when all investors review their plans. Stylized facts suggest that the end of the tax year is a candidate for one such points in time. Therefore, we should expect more support for the CCAPM during the period surrounding the end of the tax year, i.e., the fourth and first quarters in Japan where the tax year ends in December, and the first and second quarters in the United Kingdom where the tax year ends in April. Our empirical findings are consistent with these expectations. Key words: CCAPM; Japanese stock market; UK stock market; cross section of stock returns; infrequent decisions; deterministic cycles; calendar cycles History: Received November 30, 2009; accepted June 28, 2011, by Wei Xiong, finance. Published online in Articles in Advance October 7, 2011., 1. Introduction According to standard economic theory (Rubinstein 1976, Lucas 1978, Breeden 1979), the risk premium that investors require to invest in a financial asset is proportional to the covariance [...]

To authenticate to the full-text of this article, please visit this link: http://dx.doi.org/10.1111/j.1540-6261.2009.01528.x Byline: RAVI JAGANNATHAN, ALEXEY MALAKHOV, DMITRY NOVIKOV (*) Abstract: ABSTRACT In measuring performance persistence, we use hedge fund style benchmarks. This allows us to identify managers with valuable skills, and also to control for option-like features inherent in returns from hedge fund strategies. We take into account the possibility that reported asset values may be based on stale prices. We develop a statistical model that relates a hedge fund's performance to its decision to liquidate or close in order to infer the performance of a hedge fund that left the database. Although we find significant performance persistence among superior funds, we find little evidence of persistence among inferior funds. Article note: (*) Ravi Jagannathan is from Kellogg School of Management at Northwestern University and the National Bureau of Economic Research, Alexey Malakhov is from Sam M. Walton College of Business at the University of Arkansas, and Dmitry Novikov is from J.P. Morgan. We would like to thank Vikas Agarwal, Dmitri Alexeev, Torben Andersen, Duke Bristow, Art Bushonville, Bhagwan Chowdhry, Randolph Cohen, Kent Daniel, Harry DeAngelo, Dobrislav Dobrev, Shingo Goto, David Hsieh, Ken Judd, Robert Korajczyk, Ken Kroner, Ananth Madhavan, Rosa Matzkin, Narayan Naik, Todd Pulvino, Bryan Routledge, Che-Lin Su, Melvyn Teo, Sergey Tsyplakov, and Motohiro Yogo; participants in the 2006 NBER Asset Pricing Program Meeting, 2006 Western Finance Association Meeting, 2007 American Finance Association Meeting, and 2007 Advances in Theory Based Estimation: A Conference in Honor of Lars Hansen and Ken Singleton; and seminar participants at Barclays Global Investors, China Europe International Business School, East Carolina University, Georgia State University, Indian School of Business, National University of Singapore, Northwestern University, Oklahoma State University, Singapore Management University, University of Arkansas, University of Illinois at Urbana-Champaign, University of Melbourne, University of New South Wales, University of North Carolina at Chapel Hill, University of South Carolina, University of Southern California, and York University for their helpful discussions and suggestions. We are grateful to the editor, Robert F. Stambaugh, and an anonymous referee for their valuable suggestions. We are also grateful to Hedge Fund Research, Inc. for providing us with the data. Alexey Malakhov gratefully acknowledges summer research funding from Sam M. Walton College of Business. Any views expressed in this paper are those of the authors and not necessarily those of the institutions they represent.

We develop a jackknife estimator for the conditional variance of a minimum tracking error variance portfolio constructed using estimated covariances. We empirically evaluate the performance of our estimator using an optimal portfolio of 200 stocks that has the lowest tracking error with respect to the S&P 500 benchmark when three years of daily return data are used for estimating covariances. We find that our jackknife estimator provides more precise estimates and suffers less from in-sample optimism when compared to conventional estimators. Key words: jackknife; tracking error; minimum-risk portfolios History: Received July 29, 2007; accepted November 28, 2008, by David A. Hsieh, finance. Published online in Articles in Advance April 15, 2009., 1. Introduction It has been observed in the literature that the in-sample estimate of the variance of an efficient portfolio constructed using estimated inputs significantly understates the portfolio's true (out-of-sample) [...]

To purchase or authenticate to the full-text of this article, please visit this link: http://dx.doi.org/10.1111/j.1540-6261.2007.01253.x Byline: RAVI JAGANNATHAN, YONG WANG (*) Abstract: ABSTRACT When consumption betas of stocks are computed using year-over-year consumption growth based upon the fourth quarter, the consumption-based asset pricing model (CCAPM) explains the cross-section of stock returns as well as the Fama and French (1993) three-factor model. The CCAPM's performance deteriorates substantially when consumption growth is measured based upon other quarters. For the CCAPM to hold at any given point in time, investors must make their consumption and investment decisions simultaneously at that point in time. We suspect that this is more likely to happen during the fourth quarter, given investors' tax year ends in December. Article note: (*) Jagannathan is at the Kellogg School of Management, Northwestern University and the National Bureau of Economic Research; Wang is at the School of Accounting and Finance, Hong Kong Polytechnic University. We thank Douglas Breeden, John Cochrane, Zhi Da, Kent Daniel, Lars Hansen, John Heaton, Charlie Himmelberg, Martin Lettau, Deborah Lucas, Sydney Ludvigson, Monika Piazzesi, Ernst Schaumburg, Michael Sher, Annette Vissing-Jorgensen, Zhenyu Wang, Robert Stambaugh (editor), an anonymous referee, and seminar participants at the NBER Asset Pricing Meeting, University of Chicago, Cornell University, Duke/UNC Asset Pricing Conference, Federal Reserve Bank of New York, Rutgers University, University of Southern California, University of Virginia, and University of Wisconsin for helpful comments. We alone are responsible for all errors and omissions.

We evaluate the classical Cox et al. (Econometrica 53(2) (1985) 385) (CIR) model using data on London Interbank Offer Rate (LIBOR), swap rates and caps and swaptions. With three factors the CIR model is able to fit the term structure of LIBOR and swap rates rather well. The model is able to match the hump shaped unconditional term structure of volatility in the LIBOR-swap market. However, statistical tests indicate that the model is misspecified. The economic importance of these shortcomings is highlighted when the model is confronted with data on cap and swaption prices. Pricing errors are large relative to the bid-ask spread in these markets. The model overvalues shorter maturity caps and undervalues longer maturity caps. The model tends to undervalue swaptions. The magnitude of the mispricing is positively related to the magnitude of the slope of the yield curve. Our findings point out the need for evaluating term structure models using data on derivative prices. JEL classification: C13; C32; C51; E43; G12 Keywords: Multi-factor CIR; LIBOR and swap markets; CAPS; Swaptions

We provide a brief overview of applications of generalized method of moments in finance. The models examined in the empirical finance literature, especially in the asset pricing area, often imply [...]

The efficiency of a stock portfolio is evaluated through the development of a statistical sampling theory.

Without the assumption of conditional homoskedasticity, a general asymptotic distribution theory for the two-stage cross-sectional regression method shows that the standard errors produced by the Fama-MacBeth procedure do not necessarily overstate the precision of the risk premium estimates. When factors are misspecified, estimators for risk premiums can be biased, and the t-value of a premium may converge to infinity in probability even when the true premium is zero. However, when a beta-pricing model is misspecified, the t-values for firm characteristics generally converge to infinity in probability, which supports the use of firm characteristics in cross-sectional regressions for detecting model misspecification. (Reprinted by permission of the publisher.)

Taxation appeared to have an impact with regards to the behavior of stock prices in relation to dividend value. Stock prices tend to drop to less than the value of the dividend in countries where capital gains and dividends are not being taxed. At Hong Kong stock market, an average decline of HK$0.06 in stock prices was recorded between 1980 to 1993 in relation to an average dividend of HK$0.12.

In this article we develop alternative ways to compare asset pricing models when it is understood that their implied stochastic discount factors do not price all portfolios correctly. Unlike comparisons based on chi squared statistics associated with null hypotheses that models are correct, our measures of model performance do not reward variability of discount factor proxies. One of our measures is designed to exploit fully the implications of arbitrage-free pricing of derivative claims. We demonstrate empirically the usefulness of our methods in assessing some alternative stochastic factor models that have been proposed in asset pricing literature. (Reprinted by permission of the publisher.)

Most empirical studies of the static CAPM assume that betas remain constant over time and that the return on the value-weighted portfolio of all stocks is a proxy for the return on aggregate wealth. The general consensus is that the static CAPM is unable to explain satisfactorily the cross-section of average returns on stocks. We assume that the CAPM holds in a conditional sense, i.e., betas and the market risk premium vary over time. We include the return on human capital when measuring the return on aggregate wealth. Our specification performs well in explaining the cross-section of average returns. (Reprinted by permission of the publisher.)

We find support for a negative relation between conditional expected monthly return and conditional variance of monthly return, using a GARCH-M model modified by allowing (1) seasonal patterns in volatility, (2) positive and negative innovations to returns having different impacts on conditional volatility, and (3) nominal interest rates to predict conditional variance. Using the modified GARCH-M model, we also show that monthly conditional volatility may not be as persistent as was thought. Positive unanticipated returns appear to result in a downward revision of the conditional volatility whereas negative unanticipated returns result in an upward revision of conditional volatility. (Reprinted by permission of the publisher.)

A study is conducted to find out the effect of unemployment news on the performance of stock market.

The importance of the imposition of investment management constraints on risk reduction in large US portfolios is provided.

The stochastic discount factor asset pricing model can estimate risk premiums as well as the beta model.

Knowledge of the one-month interest rate is useful in forecasting the sign as well as the variance of the excess return on stocks. The services of a portfolio manager who makes use of the forecasting model to shift funds between bills and stocks would be worth an annual management fee of 2% of the value of the assets managed. During 1954:4 to 1986:12, the variance of monthly returns on the managed portfolio was about 60% of the variance of the returns on the value weighted index, whereas the average return was two basis points higher. (Reprinted by permission of the publisher.)

This paper shows that bank runs can be modeled as an equilibrium phenomenon. We demonstrate that some aspects of the intuitive 'story' that bank runs start with fears of insolvency of banks can be rigorously modeled. If individuals observe long 'lines' at the bank, they correctly infer that there is a possibility that the bank is about to fail and precipitate a bank run. However, bank runs occur even when on one has any adverse information. Extra market constraints such as suspension of convertibility can prevent bank runs and result in superior allocations. (Reprinted by permission of the publisher.)

The multigood futures pricing model of Grauer and Litzenberger is extended to a dynamic discrete time setting and tested using data on futures prices for corn, wheat, and soybeans. The parameter estimates reported previously by other researchers using stock return data are similar to those obtained by the method presented here. After rejection of the model, some suggestions are offered on which assumption may have been violated, and an interpretation to the Hansen-Singleton nonlinear instrumental variables estimation technique used in the empirical work presented is provided.

We provide a rationale for the presence of points in mortgage loan contracts. Our analysis builds on two key features. First, insurance markets are unavailable for labor income. Second, the 'due-on-sale' clause allows banks to offer loan contracts which partially insure against fluctuations in labor income. If explicit prepayment penalties are prohibited by law, points serve effectively as prepayment penalities. We also examine environments where such penalties are not prohibited and show that points will be used if interest rates cannot depend on the size of the loan. (Reprinted by permission of the publisher.)