Related papers: Self-Consistent Asset Pricing Models
Beta-sorted portfolios -- portfolios comprised of assets with similar covariation to selected risk factors -- are a popular tool in empirical finance to analyze models of (conditional) expected returns. Despite their widespread use, little…
Factor modeling of asset returns has been a dominant practice in investment science since the introduction of the Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing Theory (APT). The factors, which account for the systematic risk,…
The CAPM regression is typically interpreted as if the market return contemporaneously \emph{causes} individual returns, motivating beta-neutral portfolios and factor attribution. For realized equity returns, however, this interpretation is…
We explore a decomposition in which returns on a large class of portfolios relative to the market depend on a smooth non-negative drift and changes in the asset price distribution. This decomposition is obtained using general continuous…
Factor models characterize the joint behavior of large sets of financial assets through a smaller number of underlying drivers. We develop a network-based framework in which factors emerge naturally from the structure of interactions among…
Estimating the covariance of asset returns, i.e., the risk model, is a key component of financial portfolio construction and evaluation. Most risk modeling approaches produce a factor model that decomposes the asset variability into two…
The risk premia of traded factors are the sum of factor means and a parameter vector we denote by {\phi} which is identified from the cross section regression of alpha of individual securities on the vector of factor loadings. If phi is…
Income and risk coexist, yet investors are often so focused on chasing high returns that they overlook the potential risks that can lead to high losses. Therefore, risk forecasting and risk control is the cornerstone of investment. To…
We introduce a simple and tractable methodology for estimating semiparametric conditional latent factor models. Our approach disentangles the roles of characteristics in capturing factor betas of asset returns from ``alpha.'' We construct…
We find that the CAPM fails to explain the small firm effect even if its non-parametric form is used which allows time-varying risk and non-linearity in the pricing function. Furthermore, the linearity of the CAPM can be rejected, thus the…
We present and discuss a stochastic model of financial assets dynamics based on the idea of an inverse renormalization group strategy. With this strategy we construct the multivariate distributions of elementary returns based on the scaling…
We propose a methodology to construct tests for the null hypothesis that the pricing errors of a panel of asset returns are jointly equal to zero in a linear factor asset pricing model -- that is, the null of "zero alpha". We consider, as a…
The number of pension funds has multiplied exponentially over the last decade. Active portfolio management requires a precise analysis of the performance drivers. Several risk and performance attribution metrics have been developed since…
In the standard equilibrium and/or arbitrage pricing framework, the value of any asset is uniquely specified from the belief that only the systematic risks need to be remunerated by the market. Here, we show that, even for arbitrary large…
Pervasive cross-section dependence is increasingly recognized as a characteristic of economic data and the approximate factor model provides a useful framework for analysis. Assuming a strong factor structure where $\Lop\Lo/N^\alpha$ is…
We investigate entropy as a financial risk measure. Entropy explains the equity premium of securities and portfolios in a simpler way and, at the same time, with higher explanatory power than the beta parameter of the capital asset pricing…
We consider nonparametric estimation of mean regression and conditional variance (or volatility) functions in nonlinear stochastic regression models. Simultaneous confidence bands are constructed and the coverage probabilities are shown to…
In this paper, we use replica analysis to investigate the influence of correlation among the return rates of assets on the solution of the portfolio optimization problem. We consider the behavior of the optimal solution for the case where…
In this paper, we propose a price staleness factor model that accounts for pervasive market friction across assets and incorporates relevant covariates. Using large-panel high-frequency data, we derive the maximum likelihood estimators of…
Motivated by practical applications, we explore the constrained multi-period mean-variance portfolio selection problem within a market characterized by a dynamic factor model. This model captures predictability in asset returns driven by…