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We show that merger announcement returns account for virtually all of the measured size premium. An empirical proxy for ex ante takeover exposure positively and robustly relates to cross-sectional expected returns. The relation between size and expected returns becomes positive or insignificant, rather than negative, conditional on this takeover characteristic. Asset pricing models that include a factor based on the takeover characteristic outperform otherwise similar models that include the conventional size factor. We conclude that the takeover factor should replace the conventional size factor in benchmark asset pricing models. [ABSTRACT FROM AUTHOR]

We find that the Campbell–Cochrane external-habit model can generate a value premium if the persistence of the consumption surplus is sufficiently low. Such low persistence is supported by micro evidence on consumption. If the mean and conditional volatility of consumption growth are highly persistent, as in the Bansal–Yaron long-run risk model, then fast-moving habit can also generate, without eroding the value premium: i) empirically sensible long horizon return predictability; and ii) a price–dividend ratio for market equity that exhibits the high autocorrelation found in the data. Fast-moving habit also delivers several empirical properties of market-dividend strips. [ABSTRACT FROM AUTHOR]

We document that the aggregate hiring rate of publicly traded firms in the U.S. economy negatively predicts stock market returns and long-term cash flows, and positively predicts short-term cash flows. In addition, through a variance decomposition, we show that the time-series variation in the aggregate hiring rate is mainly driven by changes in discount rates and short-term expected cash flows, with no contribution from variation in long-term expected cash flows. We estimate a neoclassical dynamic model with labor market frictions and show that labor adjustment costs and time-varying risk are essential for the model to replicate the empirical patterns. Authors have furnished an Internet Appendix , which is available on the Oxford University Press Web site next to the link to the final published paper online. [ABSTRACT FROM AUTHOR]

This paper examines whether the cross-section of cryptocurrency returns is captured by risk factors based on consumption-based asset pricing. It is an imperative task for financial economists to find the fundamental risk behind characteristic-based cryptocurrency factors in order to economically understand cryptocurrency. To address the data availability issue in the analysis of cryptocurrency, we employ mixed data sampling (MIDAS) regression to check the relation between the principal component analysis (PCA) factors in cryptocurrency returns and the factors in the consumption capital asset pricing models (CCAPMs) and intertemporal capital asset pricing models (ICAPMs). We establish significant links between them, which in turn implies that cryptocurrency returns are investors' compensation for bearing consumption risk, conditional consumption risk, and intertemporal consumption risk. This finding underscores that cryptocurrency returns are the manifestation of macroeconomic equilibrium derived from investors' utility maximization. [ABSTRACT FROM AUTHOR]

This study examines how housing sector volatilities affect real estate investment trust (REIT) equity return in the United States. I argue that unexpected changes in housing variables can be a source of aggregate housing risk, and the first principal component extracted from the volatilities of U.S. housing variables can predict the expected REIT equity returns. I propose and construct a factor-based housing risk index as an additional factor in asset price models that uses the time-varying conditional volatility of housing variables within the U.S. housing sector. The findings show that the proposed housing risk index is economically and theoretically consistent with the risk-return relationship of Merton's conditional Intertemporal Capital Asset Pricing Model (ICAPM) (1973), which predicts an average maximum of 1.83 percent of annual housing risk premium in REIT equity return. Moreover, the housing risk index explains a significant portion of the cross-sectional variation of sectoral REIT returns. In cross-section, the positive risk-return relationship remains significant after controlling for VIX, Fama–French four factors, and a broad set of macroeconomic and financial variables. I also find that the proposed housing beta accurately forecasts U.S. macroeconomic and financial conditions. [ABSTRACT FROM AUTHOR]

Investment is an activity related to the economic and business world. Investment actions can meet future financial needs where the invested funds gain returns after a certain period. Investors with broad insights significantly influence investment decisions. This study aims to analyze the comparative calculation of investment return rates between three models, namely Single Index Model (SIM), Capital Asset Pricing Model (CAPM), and Arbitrage Pricing Theory (APT), in eight mining company sectors listed on the Indonesia Stock Exchange (IDX 30). This study uses historical data from the mining company sectors to calculate and compare the investment return rates based on these three models. The research method used is statistical analysis to evaluate and compare the predicted investment return rates from the Single Index Model (SIM), Capital Asset Pricing Model (CAPM), and Arbitrage Pricing Theory (APT). The data used includes historical stock prices, company financial data, and relevant market data. The results of this study are expected to provide a better understanding of the effectiveness and advantages of each model in the context of mining companies listed on IDX 30. The results of this study show that the Single Index Model (SIM) indicates a moderate financial potential with an average value of 7,58, which is lower compared to CAPM. A high risk (beta) of 2,20 indicates that this investment has a higher risk than the market. On the other hand, the Capital Asset Pricing Model (CAPM) has a higher average return value of 19,15, indicating greater profit potential but also commensurate risk. The Arbitrage Pricing Theory calculation of 6,46, the lowest, reflects a more cautious calculation of return estimates. The inflation beta risk value of 100.924,50 and the deposit interest beta risk of 9.320,14 are very high. [ABSTRACT FROM AUTHOR]

Purpose: This study analyzes how political-economic events have affected the Brazilian capital market over 13 years by evaluating the abnormal returns of the five most liquid stocks (Top-5). Originality/value: This research proceeds from previous studies by analyzing various political-economic events that impacted, to some extent, the prices of companies listed on the Brazilian Stock Exchange over 13 years. Considering both favorable and opposing evidence to the efficient market hypothesis (EMH), this study provides an original and robust test to evaluate market efficiency, considering various events and companies. Design/methodology/approach: We used the event study methodology to measure the impact of each event on stock prices by using the day before and after the event analyzed. We performed capital asset pricing model (CAPM) estimations with 110 observations before the event to assess abnormal returns. To assess the research hypotheses, we used the average abnormal return test around the event (Window – 1.1). Findings: We found that the five major companies in the Brazilian stock market were efficient in the EMH semi-strong form test despite 13 years of extreme events. Their returns did not change significantly after the events, differentiating themselves from studies that question market efficiency. Therefore, market participants should not expect abnormal returns in similar events. [ABSTRACT FROM AUTHOR]

This study investigates the ESG performance–systemic risk (SR) nexus among Indian companies. Using the beta coefficient from the Capital Asset Pricing Model (CAPM) and statistical analysis, it explores how ESG performance affects SR. The findings reveal that firms with higher ESG scores have lower SR sensitivity. Notably, there is a significant difference in risk sensitivity between high- and low-ESG-rated companies, with ESG effects being less pronounced in high-cap firms compared to low-cap firms. Conversely, large firms, older firms, and those with lower borrowing costs show a diminished effect of ESG ratings on their SR sensitivity. These results underscore the importance of firm-specific characteristics in determining the efficacy of ESG strategies in risk mitigation. This study reveals that ESG performance reduces SR, with market valuation affecting this relationship. [ABSTRACT FROM AUTHOR]

This paper exploits the concept of expectation dependence to propose an alternative representation of the consumption-based capital asset pricing model (C-CAPM). While the first-degree expectation dependence (FED) drives the C-CAPM's riskiness for a risk-averse investor, the second-degree expectation dependence (SED) is required to account for the downside risk faced by a prudent investor. Theoretical and empirical assessments reveal that the expectation dependence-based C-CAPM can realistically match equity and variance risk premia. The consumption SED risk emerges as a fundamental source of uncertainty driving asset prices. [ABSTRACT FROM AUTHOR]

Background: The purpose of this paper is to address how to handle uncertainty when performing an economic valuation of a medical innovation R&D project in orphan diseases from the perspective of the investor. Methods: We describe the specific uncertainty related to cash flows and the cost of capital for innovation in orphan diseases. The uncertainty in cash flows relates to sales, manufacturing and R&D costs, and probabilities of failure for each phase in the clinical trial program. We consider different net present values (NPVs) and higher standard deviations for orphan drugs compared to non-orphan drugs. Results: Numerical case base examples showed the differences in trade-off by an investor for R&D projects with differences in NPV and level of uncertainty. The investor will transfer the additional uncertainty in cash flows in a higher cost of capital. An alternative approach is the application of an "acceptability curve" based on a probabilistic sensitivity analysis, which displays the cumulative probabilities at a range of different values for the NPV. Finally, we consider uncertainty in the cost of capital itself by applying the Capital Asset Pricing Model (CAPM). Conclusions: In this paper, we described various types of uncertainty and explored various approaches to how to handle uncertainty in the economic valuation of medical innovation in orphan diseases. The bridging of health economics with economic valuation theory in the healthcare market is to our knowledge a novel approach for the valuation of medical innovation by investors. [ABSTRACT FROM AUTHOR]

According to traditional portfolio theories constraints, restrictions, and screens applied in portfolio selection reduces the diversification opportunities which can impact financial performance. Is this true in the case of socially responsible investment (SRI)? To answer this, present study analyzes the performance of Socially Responsible (SR) indices in comparison to conventional indices in an emerging economy. The uniqueness of the study is that it analyses the performance of Shariah, ESG, and thematic indices in a single study. Further, the study measures the impact of Covid‐19 on them. Comparative performance evaluation was conducted by using absolute return analysis and risk‐adjusted measures namely, Sharpe ratio, Treynor ratio, tracking error, information ratio, capital asset pricing model (CAPM), Fama–French three‐factor, and Carhart's four‐factor models. The Structural break was identified, hence analysis was conducted for the total period (January 2017–March 2023) and two sub‐periods, that is, pre and post‐Covid‐19 period. No significant difference was found between the returns of SR indices and conventional indices as against the benchmark index on the basis of absolute return analysis. Sharpe ratio and Treynor ratio both were having negative values for all the SR and conventional indices. Tracking error for all the SR and Conventional indices were very low. The CAPM and both multi‐factor models univocally pointed toward the underperformance of all the SR (except S&P BSE 100 ESG index which had equal performance) and both conventional indices against the benchmark index. Noteworthy point is that only Shariah indices gave the highest returns during post‐Covid period. This research will help in deepening the SRI in the capital market. Companies should increase their ESG scores and make efforts to be listed on the SR indices. Policymakers should announce some kind of rebates, or recognition for star‐performing companies in the field of sustainability to encourage other companies to adopt SR practices in their business operations. The novelty of the current study is that it adds to the socially responsible literature by analyzing the performance of Shariah, ESG, and Thematic indices and conventional indices in a single study in the fastest‐growing economy of India and analyses the impact of Covid‐19 on this performance. [ABSTRACT FROM AUTHOR]

The present study aimed to assess the relationship between corporate governance factors and stock returns based on the capital asset pricing model and the Fama and French three-factor model. The statistical population included companies acting in the Istanbul Stock Exchange from 2010 to 2020. Using a systematic elimination sampling method, 70 companies were selected. The data panel method was used along with two-stage regression of Fama and Macbeth [16] and EViews11 software to estimate the models. The results represented a significant and positive relationship between the level of transparency in information disclosure, the structure of the directors' board, and the structure of ownership and shareholders' rights with stock returns based on the capital asset pricing equation. Moreover, there was a significant and positive relationship between the general index of corporate governance and the stock returns of companies based on the three-factor equation of Fama and French. This index is comprised of three sub-indices. [ABSTRACT FROM AUTHOR]

Purpose: Our result of this paper aims to indicate that the beta pricing formula could be applied in a long-term model setting as well. Design/methodology/approach: In this paper, we show that the capital asset pricing model can be derived from a three-period general equilibrium model. Findings: We show that our extended model yields a Pareto efficient outcome. Practical implications: The capital asset pricing model (CAPM) model can be used for pricing long-lived assets. Social implications: Long-term modelling and sustainability can be modelled in our setting. Originality/value: Our results were only known for two periods. The extension to 3 periods opens up a large scope of applicational possibilities in asset pricing, behavioural analysis and long-term efficiency. [ABSTRACT FROM AUTHOR]

Violations of no-arbitrage conditions measure the shadow cost of intermediary constraints. Intermediary asset pricing and intertemporal hedging together imply that the risk of these constraints tightening is priced. We describe a "forward CIP trading strategy" that bets on CIP violations shrinking and show that its returns help identify the price of this risk. This strategy yields the highest returns for currency pairs associated with the carry trade. The strategy's risk substantially contributes to the volatility of the stochastic discount factor, is correlated with both other near-arbitrages and intermediary wealth measures, and appears to be consistently priced across various asset classes. Authors have furnished an Internet Appendix , which is available on the Oxford University Press Web site next to the link to the final published paper online. [ABSTRACT FROM AUTHOR]

We develop an asset pricing model with endogenous corporate policies that explains how inflation jointly affects real asset prices and corporate default risk. Our model includes two empirically founded nominal rigidities: fixed nominal debt coupons (sticky leverage) and sticky cash flows. These two frictions result in lower real equity prices and credit spreads when expected inflation rises. A decrease in expected inflation has opposite effects, with even larger magnitudes. In the cross-section, the model predicts that the negative impact of higher expected inflation on real equity values is stronger for low leverage firms. We find empirical support for the model's predictions. Authors have furnished an Internet Appendix , which is available on the Oxford University Press Web site next to the link to the final published paper online. [ABSTRACT FROM AUTHOR]

This study uses behavioural portfolio theory (BPT) within the Markowitz Portfolio Theory framework to enhance portfolio management by focusing on sustainability and risk mitigation during market downturns. It selects portfolios to hedge against market lows using Conditional Drawdown at Risk (CDaR) and Expected Regret of Drawdown (ERoD). These measures help choose securities that perform well during a market decline. This study applies drawdown-based risk metrics to assist institutional investors and fiduciaries in making informed investment and fund management decisions. By merging BPT with Markowitz’s mean–variance framework, selected investments are maintained above a safety threshold, contributing to the portfolio’s overall quality and sustainability. Additionally, by incorporating an Environmental, Social, and Governance (ESG) preference function, the findings suggest that BPT built portfolios meet traditional performance standards and align with socially responsible investment principles, thereby offering higher utility and alignment with investor values focused on sustainable investing. [ABSTRACT FROM AUTHOR]

The claim by Liu and Matthies (LM) that their macro news risk factor (NI) prices 51 portfolios (associated with four different portfolio groups) is not appropriate. In fact, their single‐factor model is successful only in explaining the momentum deciles, while producing strongly negative performance for the remaining groups. The pricing performance is more doubtful in the case of the alternative news factor (HNI), as the respective risk price is not identified. LM's conclusions stem from a combination of questionable empirical choices and misinterpretation of their results. Moreover, the NI model cannot explain prominent capital asset pricing model anomalies not considered in their study. [ABSTRACT FROM AUTHOR]

This survey offers a succinct overview of the General Framework of Portfolio Theory (GFPT), consolidating Markowitz portfolio theory, the growth optimal portfolio theory, and the theory of risk measures. Central to this framework is the use of convex analysis and duality, reflecting the concavity of reward functions and the convexity of risk measures due to diversification effects. Furthermore, practical considerations, such as managing multiple risks in bank balance sheets, have expanded the theory to encompass vector risk analysis. The goal of this survey is to provide readers with a concise tour of the GFPT's key concepts and practical applications without delving into excessive technicalities. Instead, it directs interested readers to the comprehensive monograph of Maier-Paape, Júdice, Platen, and Zhu (2023) for detailed proofs and further exploration. [ABSTRACT FROM AUTHOR]

This paper seeks to evaluate proficient perceptions within business assessments in South Africa, where such perceptions play a significant role in the evaluation process, encompassing the selection of standards and the establishment of evaluation frameworks. The evolving economy of South Africa is marked by fluctuating economic circumstances and potential growth, compounded by inadequate benchmarks and a scarcity of relevant market information. Forecasting growth rates are further complicated by macroeconomic uncertainties, leading to a reliance on proficient perceptions when industry-specific guidelines and easily comprehensible alternatives to the Capital Asset Pricing Model (CAPM) are lacking. A mixed-methods strategy is employed in this study, combining quantitative and qualitative data, along with surveys set benchmarks for business assessments. The outcomes reveal that modifications based on judgment are necessary for variables like organizational size due to the absence of CAPM alternatives. This study stresses the importance of translating scholarly discoveries into practical applications, emphasizing the challenges and uncertainties that call for proficient perceptions in business evaluations. It advances the comprehension of these obstacles and proposes that further exploring macroeconomic variables and industry-specific guidelines could offer valuable insights. The study suggests that biases in evaluations, influenced by client interests, present a promising area for future inquiry. [ABSTRACT FROM AUTHOR]

Harry Markowitz laid the mean–variance foundation for the cornerstone capital asset pricing model (CAPM). One of the most significant and persistent empirical violations of the CAPM is the size, or small-firm, effect: the average returns of small firms are much too high relative to their betas. However, the CAPM risk–return relationship should hold for the expected parameters, and statistical theory tells us that the sample parameters are not the best estimates of the ex-ante parameters. When Bayesian shrinkage is employed to the sample average returns and betas, the size effect almost completely disappears. [ABSTRACT FROM AUTHOR]

This article, titled "Editors' Introduction: The Birth of Portfolio Theory," discusses the impact of Harry M. Markowitz on the field of investing. Markowitz's 1952 paper and subsequent book, "Portfolio Selection," introduced the concept of portfolio theory and emphasized the importance of diversification. His work revolutionized the field and laid the foundation for modern portfolio management. The article also highlights Markowitz's contributions to other disciplines, such as simulation methods and sparse matrix methods. The special issue of The Journal of Portfolio Management pays tribute to Markowitz's legacy and includes personal reflections as well as scholarly contributions that build upon his work. [Extracted from the article]

Purpose: Throughout the 21st century, US households have experienced unprecedented levels of leverage. This dynamic has been exacerbated by income shortfalls during the COVID-19 crisis. Leveraging and deleveraging decisions affect household consumption. This study investigates the effect of the dynamics of household leverage and consumption on the stock market. Design/methodology/approach: The authors explore the relation between household leverage and consumption in the context of the consumption capital asset pricing model (CCAPM). The authors test the model's implication that leverage has a negative risk premium by transforming the asset pricing restriction into an unconditional linear factor model and estimate the model using the general method of moments procedure. The authors run time-series regressions to estimate individual stocks' exposures to leverage, and cross-sectional regressions to investigate the leverage risk premium. Findings: The authors show that shocks to household debt have strong and lasting effects on consumption growth. The authors extend the CCAPM to accommodate this effect and find, using various test assets, a negative risk premium associated with household deleveraging. Looking at individual stocks the authors show that the deleveraging risk premium is not explained by well-known risk factors. Originality/value: This paper contributes to the literature on the role of leverage in economics and finance by establishing a relation between household leverage and spending decisions. The authors provide novel evidence that households' leveraging and deleveraging decisions can be a fundamental and influential force in determining asset prices. Further, this paper argues that household leverage might explain the small, persistent, and predictable component in consumption growth hypothesised in the long-run risk asset pricing literature. [ABSTRACT FROM AUTHOR]

Purpose: This paper evaluates the performance of actively managed conventional and Islamic equity funds in a developing economy with a focus to assess the performance-growth puzzle posited by Gruber (1993) (a.k.a Gruber's puzzle). Under the context of an emerging market of Pakistan, this study explores if actively managed equity fund (AMEF) managers have been able to add value by outperforming the market in terms of stock-selection and market-timing abilities; and the comparative performance analysis of Islamic versus conventional AMEFs is also carried out. Design/methodology/approach: We employ Sharpe and Treynor ratios, Capital asset pricing model, Fama–French three factors model (1993), Carhart four-factor model (1997) and Hendrickson (1981) market timing models on 45 equity funds comprising of 23 conventional and 22 Islamic equity funds operating in Pakistan for a period of 10 years. The overall sample period (2008–2018) is divided into two 5 years sub-periods (i.e. 2009–2013 and 2014–2018) and three 3 years sub-periods (2009–2011, 2012–2014 and 2015–2017) to be viewed in conjunction with the country's macro-economic condition. Findings: We report that the actively managed equity funds (AMEFs) were unable to beat the market index with their stock selection or market timing capabilities. However, AMEFs depicted improved performance in the post-global financial crisis period where both conventional and Islamic AMEFs generated substantial rewards for the given amount of risk. Also, conventional AMEFs outperformed Islamic AMEFs potentially due to their holdings in highly leveraged value and large-cap stocks, while Islamic AMEFS invest more cautiously in small-cap and value firms. Analysis of market timing skills revealed that the funds have not been able to select the undervalued stocks and adopted a defensive strategy in the post-global financial crisis recovery period. Practical implications: Our findings shed some interesting insights and raise some pertinent questions for research, policy, and practice – specifically for developing countries' context. The no 'return-growth' configuration defies its fit with the 'Gruber puzzle' and somewhat presents a case of what we call the 'Inverse Grubber puzzle'. This novel notion of the 'Inverse Grubber puzzle' should inform policy and practice to reflect on their practices, institutional arrangement, regulatory framework and policy design in developing economies characterized by lacklustre performance and growth of AMEFs. For example, the regulatory design may consider focusing on stimulating financial inclusion and deepening by motivating low-cost Index tracker funds (ITFs) – with lower fund management costs, while allocating the avoided cost to flow towards effective marketing campaigns driving greater awareness, financial deepening, and investor base diversification. For future research, financial development researchers may explore the implications and appropriateness of AMEFs versus ITFs in other developing economies. Originality/value: The work reported in this paper is original and constitutes a valuable asset for ethno-religious-sensitive investors. The research has not been published in any capacity and is not under consideration for publication elsewhere. [ABSTRACT FROM AUTHOR]

Mean-variance analysis and the capital asset pricing model provide several useful insights. However, their focus on short-term returns is of limited use and potentially misleading for investors with long horizons. For value investors, risk is better measured by long-run uncertainty about asset income than by short-run uncertainty about asset prices. [ABSTRACT FROM AUTHOR]

The authors estimate the alpha and beta of private equity investments using their desmoothed quarterly returns. Although computing the alpha and beta using a lagged linear regression between private and public market returns is straightforward, reconstructing desmoothed private market returns is trickier. A time series of desmoothed private capital returns has application in asset allocation, risk modeling, and return attribution. The authors use a state space modeling framework in which the desmoothing and the parameter estimation are done simultaneously using Bayesian inference. This is likely the first attempt to solve a full Bayesian model that can simultaneously estimate a desmoothed time series of returns as well as perform a lagged linear regression to estimate capital asset pricing model (CAPM) style parameters for private capital. The authors perform extensive model checking, look out for the model's convergence, and resolve any issues leading to overfitting. The estimates are precise with very low Monte Carlo simulation errors and are also in alignment with those in the literature, which validates this model and desmoothing technique. [ABSTRACT FROM AUTHOR]

This article is an introduction to a special issue of the Journal of Portfolio Management focused on investing in private markets. The article highlights the challenges faced by asset managers when investing in private markets, including managing liquidity, difficulties in valuation, and applying performance evaluation methodologies. The special issue includes nine articles that provide guidelines and advice on how to address these challenges. Topics covered in the articles include benchmarking private fund performance, the role of lagged betas in accounting for returns, factor-based strategies in private debt investing, a novel metric for valuing private equity investments, evaluating the performance of private equity funds, the risk and return of venture capital investments, valuation methodologies for private companies, and rebalancing strategies for portfolios with private assets. These articles provide valuable insights for asset managers involved in or considering investing in private markets. [Extracted from the article]

We introduce the info‐metrics approach to empirical asset pricing under ambiguity. We apply relative entropy as a pseudo‐metric of model discrepancy, and generalized maximum entropy as a principle of statistical inference, to cross‐sectional asset pricing tests. We show that a single‐factor market representation of the CAPM under ambiguity can explain the cross‐section of U.S. stock returns without the aid of additional risk factors. The additional factors can be interpreted as compensations for idiosyncratic ambiguity. The approach can also recover the market price of ambiguity that sets a lower (entropy‐based) bound on stock prices, which can be understood as investors' "margin of safety" against extreme market events. [ABSTRACT FROM AUTHOR]

The valuation of banks is inherently complicated because of the uncertainties arising from their information opaqueness and inherent risks. Unlike non-banking firms, banks require specialised equity-side valuation approaches. This study addresses a gap in the literature by examining valuation methods used by bank equity researchers. The study used a total of 201 reports on South African banks (2018–2023), 56 reports on Nigerian banks (2018–2023), and 27 reports on Kenyan banks (2018–2023) to investigate the bank equity valuation methods utilised by analysts in the employ of Investec Ltd. and Standard Bank Group Ltd. The study's findings show that Investec's South African analysts predominantly used the warranted equity method, based on book value (BV), and return on equity (ROE), for valuing shares throughout the South African, Nigerian, and Kenyan banks surveyed. Furthermore, Standard Bank Group's analysts employed this method, incorporating tangible net asset value (tNAV) and return on tangible equity (ROTE), for South African and Nigerian banks, but in Kenya their analysts used the residual income model to value the equities of the five Kenyan banks they covered. These findings suggest that the warranted equity method and the residual income model are the mostly used bank equity valuation methods in South Africa, Nigeria, and Kenya. The study concludes with relevant recommendations, offering significant insights for banks, regulators, and investors to make knowledgeable decisions concerning equity valuation. [ABSTRACT FROM AUTHOR]

This paper aims to comprehensively compare the risk-return profiles of Islamic and conventional equity markets, providing valuable insights into the financial performance of stock market indices in Islamic countries as compared to those in developed nations. The objective is to delve into the intricate dynamics of these markets, shedding light on how they respond to various economic and financial factors. By focusing on the performance metrics of stock market indices in both Islamic and developed countries, this study intends to analyze not only the overall returns generated but also the associated risks involved. In doing so, it seeks to unearth the nuances in investment opportunities, uncovering potential patterns of divergence or convergence between these two market segments. Furthermore, this research endeavors to discern how different economic and regulatory environments impact these markets, contributing to a more profound understanding of global investment. [ABSTRACT FROM AUTHOR]

Purpose: Recent studies suggested the ratio of option to stock volume reflected the private information. Informed traders were drawn to the options market for its leverage effect and relatively low transaction costs. Informed traders use different intervals of option moneyness to execute their strategies. The question is which types of option moneyness were traded by informed traders and what information was reflected in the market. In this study, the authors focused on this question and constructed a method for capturing the activity of informed traders in the options and stock markets. Design/methodology/approach: The authors constructed the daily measure, moneyness option trading volume to stock trading volume ratio (MOS), to capture the activity of informed traders in the market. The authors formed quintile portfolios sorted with respect to the moneyness option to stock trading volume ratio and provided the capital asset pricing model and Fama–French five-factor alphas. To determine whether MOS had predictive ability on future stock returns after controlling for company characteristic effects, the authors formed double-sorted portfolios and performed Fama–Macbeth regressions. Findings: The authors found that the firms in the lowest moneyness option trading volume to stock trading volume ratio for put quintile outperform the highest quintile by 0.698% per week (approximately 36% per year). The firms in the highest moneyness option trading volume to stock trading volume ratio for call quintile outperform the lowest quintile by 0.575% per week (approximately 30% per year). Originality/value: The authors first propose the measures, moneyness option trading volume to stock trading volume ratio, that combined with the trading volume and option moneyness. The authors provide evidence that the measures have the predictive ability to the future stock returns. [ABSTRACT FROM AUTHOR]

Introduction: Realized volatility analysis of assets in the Brazilian market within a multivariate framework is the focus of this study. Despite the success of volatility models in univariate scenarios, challenges arise due to increasing dimensionality of covariance matrices and lower asset liquidity in emerging markets. Methods: In this study, we utilize intraday stock trading data from the Brazilian Market to compute daily covariance matrices using various specifications. To mitigate dimensionality issues in covariance matrix estimation, we implement penalization restrictions on coefficients through regressions with shrinkage techniques using Ridge, LASSO, or Elastic Net estimators. These techniques are employed to capture the dynamics of covariance matrices. Results: Comparison of covariance construction models is performed using the Model Confidence Set (MCS) algorithm, which selects the best models based on their predictive performance. The findings indicate that the method used for estimating the covariance matrix significantly impacts the selection of the best models. Additionally, it is observed that more liquid sectors demonstrate greater intra-sectoral dynamics. Discussion: While the results benefit from shrinkage techniques, the high correlation between assets presents challenges in capturing stock or sector idiosyncrasies. This suggests the need for further exploration and refinement of methods to better capture the complexities of volatility dynamics in emerging markets like Brazil. [ABSTRACT FROM AUTHOR]

This study examines the relationship between the reduction of systematic risk and mergers and acquisitions (M&As) only in the Greek banking system. We have to mention that Adam et al. (2012) analyzed and estimated the time-varying betas of the banking sectors in eight advanced markets but they did not find strong evidence of declining systematic risk before the recent financial and sovereign crises, in contrast to our own work which deals with the systematic risk of banks in emerging economies. This research aims to investigate if the Greek systemic banks reduced the systematic risk after the main wave of M&As that started and completed soon after the international financial crisis of 2009, but before the new financial crisis that the COVID-19 pandemic brought in Greece. The purpose of this monograph was to examine the impact of systematic risk (Beta b) from those M&As. Our findings were extracted from multiple linear regressions using the capital asset pricing model (CAPM) and showed that the reduction of systematic risk succeeded after M&As that took place in the Greek banking industry after the international financial crises but before the COVID-19 pandemic. For this reason, maybe in some other economies mainly in Europe, the banks would follow the same strategy of M&As to reduce their systematic risk. [ABSTRACT FROM AUTHOR]

Researchers traditionally compute isolated points for an efficient frontier and assume a line which passes through a risk-free asset r f and is tangent to the frontier. The tangency plays pivotal roles for the capital asset pricing model (CAPM). However, the assumption may not hold in the presence of kinks (as non-differentiable points) on efficient frontiers. Kinks are detected by parametric-quadratic programming only and not by ordinary portfolio optimization. Up until now, there has been no research to theoretically scrutinize kink properties (especially implications to CAPM) and systematically quantify the nonexistence of the tangency. In such an area, this paper contributes to the literature. In theorems and corollaries, we prove the nonexistence of the tangency and substantiate that expected-return axis is composed of piecewisely connected intervals for which the tangency does not exist and intervals for which the tangency exists. Computationally, we reveal universal existence of kinks (e.g., 0.2 to 8.0 kinks for 5-stock to 1800-stock portfolio selections) and the tangency-nonexistence ratios as about 0.066. [ABSTRACT FROM AUTHOR]

This paper presents a novel theoretical framework for incorporating climate risks and adaptation investments into infrastructure debt pricing. Utilizing the Capital Asset Pricing Model (CAPM), the framework extends the conventional modeling of infrastructure project revenues and costs to include climate risk considerations. It proposes three climate-informed revenue and cost formulations: adjustmentment of mean and standard deviation, incorporation of extreme climate events via Pareto and Poisson distributions, and a climate-informed cost model that includes adaptation investment. The paper demonstrates the application of this model in pricing a loan for a Light Rail Transit project in Costa Rica, introducing the concepts of "flood risk premium" and "adaptation curves". This study not only offers a novel lens through which to view infrastructure investment under climate uncertainty but also sets the stage for transformative policy and practice in financial risk assessment, encouraging a shift towards more sustainable and resilient infrastructure development. [ABSTRACT FROM AUTHOR]

The objective of this study is to investigate short-run performance and whether the IPOs are over-priced or under-priced in various window periods. This study applies one-sample t-tests, capital asset pricing models, and market-adjusted excess return to quantify the short-term pricing performance as well as the risk and return of initial public offerings and market indices. The study investigates the claim that post-listing initial public offerings (IPOs) guarantee short-term gains. The twelve months following the listing, in particular, have seen the biggest gains. According to reports, investors who buy shares in IPOs get strong returns in this period. The market-adjusted initial returns for the IPOs registered on the National Stock Exchange between January 2019 and December 2020 have been found to be roughly 44%, per this analysis. [ABSTRACT FROM AUTHOR]

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We propose a new asset pricing model that is applicable to the big panel of return data. The main idea of this model is to learn the conditional distribution of the return, which is approximated by a step distribution function constructed from conditional quantiles of the return. To study conditional quantiles of the return, we propose a new conditional quantile variational autoencoder (CQVAE) network. The CQVAE network specifies a factor structure for conditional quantiles with latent factors learned from a VAE network and nonlinear factor loadings learned from a "multi-head" network. Under the CQVAE network, we allow the observed covariates such as asset characteristics to guide the structure of latent factors and factor loadings. Furthermore, we provide a two-step estimation procedure for the CQVAE network. Using the learned conditional distribution of return from the CQVAE network, we propose our asset pricing model from the mean of this distribution, and additionally, we use both the mean and variance of this distribution to select portfolios. Finally, we apply our CQVAE asset pricing model to analyze a large 60-year US equity return dataset. Compared with the benchmark conditional autoencoder model, the CQVAE model not only delivers much larger values of out-of-sample total and predictive R2's, but also earns at least 30.9% higher values of Sharpe ratios for both long-short and long-only portfolios. [ABSTRACT FROM AUTHOR]

This article considers tests of alpha in linear factor pricing models when the number of securities, N , is much larger than the time dimension, T , of the individual return series. We focus on class of tests that are based on Student's t -tests of individual securities which have a number of advantages over the existing standardized Wald type tests, and propose a test procedure that allows for non-Gaussianity and general forms of weakly cross-correlated errors. It does not require estimation of an invertible error covariance matrix, it is much faster to implement, and is valid even if N is much larger than T. We also show that the proposed test can account for some limited degree of pricing errors allowed under Ross's arbitrage pricing theory condition. Monte Carlo evidence shows that the proposed test performs remarkably well even when T  =   60 and N  =   5000. The test is applied to monthly returns on securities in the S&P 500 at the end of each month in real time, using rolling windows of size 60. Statistically significant evidence against Sharpe–Lintner capital asset pricing model and Fama–French three and five factor models are found mainly during the period of Great Recession (2007M12–2009M06). [ABSTRACT FROM AUTHOR]

The United Nations Sustainable Development Goals (SDGs) made an urgent call for action by all the countries across the globe, with an aim to end poverty, improve health and education, reduce inequality, and spur economic growth – all of this is intended to be achieved while tackling climate change and working to protect environment and preserve earth. However, these goals cannot be achieved unless money is mobilised to finance climate change mitigation and adaptation efforts across the world. In response, various manifestations of green bonds have appeared in the market and these are considered as a bridge to the achievement of the SDGs – this is because climate mitigation and adaptation are integral to successful implementation of the SDGs. Using the Capital Asset Pricing Model, Fama–French Three Factor, Carhart Four Factor and Fama–French Five Factor pricing models, our study provides empirical evidence that the announcement of green bonds issuance lead to positively abnormal return on stocks. We divided our dataset into two parts. The first part of the dataset is from 01/01/2013 to 30/06/2018 and later part analyses the period from 01/07/2018 to 30/06/2022. The consistent results highlight the firms' and investors' efforts towards climate action (SDG13) and strongly suggest that green bonds play an important role as a bridge to the SDGs. [ABSTRACT FROM AUTHOR]

Research background: Conventional CAPM is a well-known and tested theory on various capital markets. It was also repeatedly rejected as a model of capital pricing. This article proposes a different approach to both CAPM testing and the use of other risk measures. In addition, research is global, including emerging countries. Purpose of the article: This paper investigates the standard CAPM, and this model is based on higher moments of the return distribution for the global emerging market. In addition, this paper aims to compare the conventional and downside CAPM versions using the beta coefficient and co-moments. Methods: Contrary to the classical unconditional tests for the risk premium, conditional relationships are also estimated considering the market portfolio condition. Moreover, the studies considered conventional and downside approaches to risk measures. The cross-sectional regressions are based on the Fama-MacBeth (F-M) procedure and panel models. Findings & value added: The findings contribute to the debate on whether beta coefficient and higher order co-moments in conventional and downside approaches can explain the crosssectional emerging indices returns. The unconditional models using all measures do not significantly describe the cross-sectional volatility of returns. The cross-sectional regressions in up and down-market based on both the classic F-M procedure and panel models show that the beta and co-kurtosis risk premium is significant and depends on market conditions. The risk premium for co-skewness is not valid, and the direction of the relationships is opposite than expected. Research also demonstrates that the test results of CAPM relationships are not robust to the presence of outliers and shocks resulting from the Covid-19 pandemic in the context of risk-return space. Research provides strong support for the importance of downside risk in the context of standard CAPM and, above all, higher co-moments. [ABSTRACT FROM AUTHOR]

Price markups and firms' Tobin's Q ratios are widely believed to have been increasing in the past several decades. Various models for the calculation of price markups have been developed, each relying on the historically held definition of the ratio of price to marginal cost; however, all of these have methodological drawbacks, and some of the results they have produced have been poorly reflective of the near past wider macroeconomic experience. This paper defines a new approach for the definition and measurement of markup pricing, and it also avoids some of the issues surrounding the marginal cost approaches by using the measure of economic rent and the capital asset pricing model. The results show limited markup pricing for the UK's FTSE 100 companies (2018–2023), but that certain real estate, technology/media and financial services/equity investment firms have enjoyed higher price markup levels. An analysis of the business models of these firms is used to qualitatively propose explanations for such markups. This work offers formal proof that that the expected price markup is equal to Tobin's Q and finds that the empiric market level of markup is near equivalent to the market Tobin's Q; the differences between the markup and Tobin's Q at the level of the firm are equally assessed. This work challenges the general consensus that price markups are above one and have been increasing; it may also aid policy makers with respect to taxation policy and regulatory measures, as well as the financial management of firms in decisions concerning capital deployment and portfolio management. The method merits expansion to wider data sets, as well as to those from outside of the UK. [ABSTRACT FROM AUTHOR]

This paper explores the use of nonparametric methods to estimate factor models in finance. Nonparametric methods are used to estimate alphas (pricing errors) and betas (factor loadings) in the conditional Capital Asset Pricing Model and conditional multifactor models. Nonparametric estimation of factor modeling involves choosing techniques which are different both technically and in application, but common in the nonparametric literature. Nonparametric methodology does not impose any functional form on how alphas or betas evolve over time. Local data is used in estimations, but of crucial significance is the bandwidth selection or optimal window size. Clearly, observations further away from time t are less relevant in estimating time t alphas and betas, if we are too far away from time t we potentially have a very large bias. However, if too small a bandwidth is selected, the estimate could be quite noisy, leading to a large variance. This paper discusses three topics in the realm of nonparametric multifactor modeling. I explore two contributions to the literature, a leave-one-outcross- validation technique and a plug-in technique, and compare their effectiveness. The cross-validation method is completely data driven, while the plug-in method relies on choosing an unknown parameter in estimating the optimal window size. Cross validation emerges as the more robust methodology. Using the same data, both nonparametric approaches are compared to the traditional parametric Fama-French three factor model. [ABSTRACT FROM AUTHOR]

This paper investigates a set of realised higher‐order co‐moment risk–return relationships in the Australian stock market. We test the predictive power of the asset pricing model by implementing the two‐, three‐, four‐moment Capital Asset Pricing Model. Our findings show that investors respond differently to information related to realised higher‐order co‐moments, and that the corresponding gamma (normalised co‐skewness) and kappa (normalised co‐kurtosis) risk factors remain priced in the presence of continuous beta and jump beta. Furthermore, we find that the realised high‐order co‐moment risk measures are priced differently and remain significant even when combined with a set of firm characteristics. [ABSTRACT FROM AUTHOR]

This study explores the effectiveness of entropy as a proxy of aggregate market risk, in explaining the cross-section of excess returns in asset pricing model, after controlling for established factors like market excess returns, size, book to market and momentum. The analysis considers Indian firms, given that Indian capital markets are characterized by relatively thin trading and higher volatility compared to developed markets. Entropy is estimated using Shannon Entropy. Factor mimicking portfolio is constructed based on Shannon Entropy, whose returns are used as additional risk factor in Fama–French–Carhart four factor asset pricing model. Gibbons Ross Shanken-F statistic and Adjusted R2 are used to judge the efficacy of this factor in capital asset pricing model. All analysis is done using built in functions of python. Market beta, size and Book-to-Market are found to impact equity returns significantly. Entropy factor also impacts equity returns, but to a lesser extent. Explanatory power of asset pricing model is found to improve after inclusion of entropy factor, as indicated by GRS-F Statistic and Adjusted R2. Entropy augmented Capital Asset Pricing Models can be used by firms to decide hurdle rate for project evaluation and by asset managers for identifying over-valued/under-valued securities. This is the first study that investigates the role of entropy in explaining asset returns, in addition to other established priced factors. This study is limited to Shannon Entropy only. Other forms of entropy may improve results further, and should be explored in future research. [ABSTRACT FROM AUTHOR]

This book review discusses "Arturo Cifuentes and Ventura Carlin: the worth of art. Financial tools for the art market," which aims to introduce financial methods for investing in the art market. The book covers topics such as computing returns, constructing price indices, analyzing artists' creativity curves, measuring color in paintings, and discussing art market indices. It also explores the use of advanced quantitative techniques, economic theory, and option theory in the art market. However, the book has been criticized for its structure and lack of in-depth discussion on the limits and relevance of these techniques in the art market. [Extracted from the article]

Expected returns, variances, betas, and alphas are all non-linear functions of the investment horizon. This seems to be a fatal conceptual problem for the capital asset pricing model (CAPM), which assumes a unique common horizon for all investors. We show that under the standard assumptions, the theoretical CAPM equilibrium surprisingly holds with the 1-period parameters, even when investors have heterogeneous and possibly much longer horizons. This is true not only for risk-averse investors, but for any investors with non-decreasing preferences, including prospect theory investors. Thus, the widespread practice of using monthly betas to estimate the cost of capital is theoretically justified. [ABSTRACT FROM AUTHOR]

We propose testing asset pricing models using multihorizon returns (MHRs). MHRs effectively generate a new set of test assets that is endogenous to the model and that identifies a broad set of possible conditional misspecifications. We apply MHR-based testing to prominent linear factor models and show that these models typically do a poor job of pricing longer-horizon returns, with pricing errors that are similar in magnitude to the risk premiums they were designed to explain. We trace the errors to the conditional factor dynamics. Explicitly incorporating factor timing into the models often makes mispricing worse, thereby posing a challenge for future research. [ABSTRACT FROM AUTHOR]