In an asset-pricing model calibrated to match the standard asset pricing empirical properties –in particular, the time-variation in the equity premium – we calculate the welfare (value) implications of sub-optimal capital budgeting decisions. Specifically, we calculate that an investment policy that ignores the timevariation in the equity premium, such as would occur with a cost of capital foll...

In strict terms, the Capital Asset Pricing Model applies only to marketed assets, but the CAPM is frequently used to assign prices to nonmarketed assets as well. The Correlation Pricing Formula (CPF) is similar in form to the CAPM, and gives the same result. However, the CPF expresses the price of a nonmarketed asset in terms of a priced asset that is most correlated with the nonmarketed asset,...

In this paper it is demonstrates that if assets are priced according to Black’s (1972) CAPM, then tests on the cointegrated VAR can reveal evidence for or against integration of financial markets. If the market portfolios cointegrate one-to-one and share the same deterministic long-run trend, the markets obey the law of one price. Furthermore, it is shown how the driving force of the prices can...

This paper provides an economic explanation of the value premium, differences in price/dividend ratios of value and growth assets and variance-covariance structure of their realized returns within the long-run risks model of Bansal and Yaron (2004). Consistent with time-series properties of observed cash-flow data, value firms exhibit higher exposure to low-frequency fluctuations in aggregate c...

By formulating a nested test of the asymmetric response model of Bawa, Brown, and Klein (1981), the mean-lower partial moment CAPM (LPMCAPM) of Bawa and Lindenberg (1977) and the mean-variance CAPM of Sharpe (1963, 1964), Lintner (1965) and Mossin (1969), this paper investigates the relative merits of symmetric and asymmetric risk measures using UK equity data for di®erently sized companies and...

Beta, as measured by the Capital Asset Pricing Model (CAPM), is widely used for pricing stocks, determining the cost of capital, and gauging the extent to which markets are integrated. The CAPM model assumes that equilibrium conditions prevail. The choice of which market portfolio to use in the regression – the home country or global index – depends on the level of global market integration. We...

The relationship between trading volume and securities prices is a complex one which, when understood properly, can lead to many insights in portfolio theory. Over the past forty years, much work has been done trying to understand this relationship. In this document, we will attempt to introduce and discuss some of these papers. First, we introduce basic topics of finance theory, such as the Ca...

What is the best way to incorporate a risk premium into the discount rate schedule for a real investment project with uncertain payo¤s? The standard CAPM formula suggests a beta-weighted average of the return on a safe investment and the mean return on an economy-wide representative risky investment. Suppose, though, that the project constitutes a tail-hedged investment, meaning that it is expe...

Adrian and Franzoni (2005) suggest that beta of a stock is determined by the factor loading of its unobservable long-run beta. The fundamental idea behind this model is that investors engage in a learning process of estimating this long-run beta. In this paper, a variation of this model is tested. Instead of estimating long-run beta, investors try to learn about factor loading. Given the long-r...