Semiparametric Estimation of aCharacteristic-based Factor Model ofCommon Stock Returns

We introduce an alternative version of the Fama-French three-factor model of stockreturns together with a new estimation methodology. We assume that the factorbetas in the model are smooth nonlinear functions of observed securitycharacteristics. We develop an estimation procedure that combines nonparametrickernel methods for constructing mimicking portfolios with parametric nonlinearregression to estimate factor returns and factor betas simultaneously. Themethodology is applied to US common stocks and the empirical findings comparedto those of Fama and French.characteristic-based factor model, arbitrage pricing theory, kernelestimation, nonparametric estimation.

Semiparametric estimation of a characteristic-based factor model of common stock returns

We introduce an alternative version of the Fama–French three-factor model of stock returns together with a new estimation methodology. We assume that the factor betas in the model are smooth nonlinear functions of observed security characteristics. We develop an estimation procedure that combines nonparametric kernel methods for constructing mimicking portfolios with parametric nonlinear regression to estimate factor returns and factor betas simultaneously. The methodology is applied to US common stocks and the empirical findings compared to those of Fama and French

A Unified Beta Pricing Theory

This paper derives Ross's mutual fund separation theory and a new, equilibrium version of Ross's arbitrage pricing theory as special cases of a general theory. The paper also reveals that the two theories are identical in their predictions of asset prices and portfolio returns. The capital asset pricing model (a restricted case of the mutual fund separation theory) receives special treatment

THE DETERMINANTS OF COUPON DISCOUNTS FOR BREAKFAST CEREALS

This study identifies the determinants of coupon values at the brand level using a framework developed from price discrimination theory and the principles of demand. Couponing is considered within the context of a complex marketing program in which it is coordinated with other non-price promotional strategies. A simultaneous, two-equation, fixed-effects, panel-data model is specified and fitted with data on household purchases of ready-to-eat (RTE) breakfast cereals between 1992 and 1997. The empirical model accounts for the bi-directional causality between brand prices and discount levels and captures the retail effects of the major cereal maker's price cuts and discount reductions that occurred in 1996. Higher brand prices cause coupon values to rise, supporting the hypothesis that cereal makers price discriminate among consumers. Other non-price promotions, including advertising, store flyers, and in-store displays, appear to be coordinated with couponing. Specifically, coupon values fall with more intense advertising and in-store displays but rise when the couponed products are featured in store flyers. Discount levels are positively related to brand market share and the size of discounts that are redeemed for rival cereals. Moreover, coupon values fall with increasing brand loyalty among RTE cereal purchasers. Cereal prices are positively affected by coupon values, advertising expenditures, food-ingredient and packaging costs, and the prices of competing brands. Inventory levels are negatively correlated with brand price. Employee wages were not found to significantly influence cereal prices.Marketing,

Performance Measurement with The Arbitrage Pricing Theory A New Framework for Analysis

The measurement of portfolio performance is an important practical application of asset pricing theory. Two popular measures of performance are the ‘Jensen coefficient’ and Treynor and Black’s ‘appraisal ratio’. U’sing the Capital Asset Pricing Model (CAPM), Jensen (1968) suggests that a positive deviation of a portfolio’s average return from that predicted by the security market line (the Jensen coefficient) indicates superior performance. The appraisal ratio is a refinement of Jensen’s measure and is equal to the ratio of the Jensen coefficient to the amount of non-market risk undertaken by the manage

Cash Management for Index Tracking

Apositive cash position has two disadvantages for an index-tracking portfolio (a portfolio designed to mimic the retum on an equity index). First, equity indexes have a zero weight in cash, so a tracking portfolio with a positive weight will suffer from tracking error because of the mismatch in the cash weight. Second, the risk-free retum is lower than the expected retum on equities, so on average, a tracking portfolio with a positive cash holding will underperform the index portfolio

Cash Management for Index Tracking

Apositive cash position has two disadvantages for an index-tracking portfolio (a portfolio designed to mimic the retum on an equity index). First, equity indexes have a zero weight in cash, so a tracking portfolio with a positive weight will suffer from tracking error because of the mismatch in the cash weight. Second, the risk-free retum is lower than the expected retum on equities, so on average, a tracking portfolio with a positive cash holding will underperform the index portfolio

The Irish Risky Lending Gap

This paper develops a simple model of the gap between socially and privately optimal bank lending when a bank has an overhang of impaired loans, and analyzes government policies designed to close this gap. The impaired loans have risky cash fows but observable market values. A number of basic concepts are explicated including the risky lending gap, the capital component and asset risk component of the risky lending gap, capital injections versus asset purchases as policy tools, decomposition of the e¤ects of asset purchases into loan substitution and risk absorption e¤ects, the supply schedule of risky lending, the no-lending trap, and a risk-capital metric for comparing the various policy choices. The model is calibrated to match the cur- rent Irish banking environment and some tentative policy implications are suggested

A Global Stock and Bond Model

Factor models are now widely used to support asset selection decisions. Global asset allocation, the allocation between stocks versus bonds and among nations, usually relies instead on correlation analysis of international equity and bond indexes. It would be preferable to have a single integrated framework for both asset selection and asset allocation. This framework would require a factor model applicable at an asset or country level, as well as at a global level, that covers both stocks and bonds

The U.S. and Irish Credit Crises: Their Distinctive Differences and Common Features

Abstract: Although the US credit crisis precipitated it, the Irish credit crisis is an identifiably separate one, which might have occurred in the absence of the U.S. crash. The distinctive differences between them are notable. Almost all the apparent causal factors of the U.S. crisis are missing in the Irish case; and the same applies vice-versa. At a deeper level, we identify four common features of the two credit crises: capital bonanzas, irrational exuberance, regulatory imprudence, and moral hazard. The particular manifestations of these four “deep” common features are quite different in the two cases.