Predictability of equity returns and conditional asset pricing

In this dissertation, I investigate the applicability of some asset-pricing models by exploiting the predictive power of structural variables and accommodate the characteristic of predictability of stock returns in a theoretical conditional asset-pricing framework.;In the first chapter of the dissertation, I briefly review the relevant literature on the predictability of stock returns, and discuss the motivations for my research, and finally present my contributions to the existing literature while providing some discussions for future research. Chapter 2 examines the ability of the Fama-French three-factor model and the CAPM in estimating portfolios\u27 returns. Instead of using historical average of risk premiums as a proxy for the estimated risk premiums, I propose that the estimation of risk premiums is conditioned on structural variables. The out-of-sample results from a simple trading strategy show that at least in the short-run, the structural variables generate better estimates of risk premiums than the historical averages of risk premiums, and the Fama-French three-factor model outperforms the CAPM in estimating portfolios\u27 returns. Chapter 3 of the dissertation investigates the common and country-specific components in national stock price indices. The proposed general dynamic state-space model not only incorporates the feature of predictability of stock returns by modeling the price index as the combination of a permanent component and a transitory component, but also allows distinguishing the common shocks shared by each country from the country-specific shocks. It is found that for the G7 countries, there exist country-specific permanent and transitory components, which implies that the price indices of these countries are not only predictable, but also they are not cointegrated around one stochastic trend. Therefore, there exist potential long-run international diversification benefits. In light of the predictability of stock returns, Chapter 4 proposes a conditional two-beta intertemporal asset pricing model to investigate how the permanent shock and the transitory shock to market return are priced. Two decomposition methods are employed: the Hodrick-Prescott approach and the unobserved component method with Markov-Switching disturbances. The traditional two-pass evaluation indicates that this two-beta model outperforms the CAPM, but it is not as good as the Fama-French three-factor model in explaining stock returns

Temperature dependence of circular DNA topological states

Circular double stranded DNA has different topological states which are defined by their linking numbers. Equilibrium distribution of linking numbers can be obtained by closing a linear DNA into a circle by ligase. Using Monte Carlo simulation, we predict the temperature dependence of the linking number distribution of small circular DNAs. Our predictions are based on flexible defect excitations resulted from local melting or unstacking of DNA base pairs. We found that the reduced bending rigidity alone can lead to measurable changes of the variance of linking number distribution of short circular DNAs. If the defect is accompanied by local unwinding, the effect becomes much more prominent. The predictions can be easily investigated in experiments, providing a new method to study the micromechanics of sharply bent DNAs and the thermal stability of specific DNA sequences. Furthermore, the predictions are directly applicable to the studies of binding of DNA distorting proteins that can locally reduce DNA rigidity, form DNA kinks, or introduce local unwinding.Comment: 15 pages in preprint format, 4 figure

Exchange rate risk in the U.S. stock market: Working paper series--11-07

Kolari, Moorman, and Sorescu (2008) show that exchange rate risk measured by contemporaneous exchange rate changes is priced in the US stock market. However, by construction, their exchange rate risk factor has a strong correlation with the size factor, and their exchange rate sensitivity portfolios have a strong factor structure. To test whether their results are spurious, we carry out two sets of tests. The first set is motivated by Lewellen, Nagel and Shanken (2010), while the second set is motivated by the voluminous literature which suggests that stock returns are heavy-tailed (e.g. Rachev and Mittnik, 2000). Unlike Kolari, Moorman, and Sorescu (2008), we find that exchange rate risk measured by contemporaneous exchange rate changes is not priced in the US stock market. We use industry portfolios which do not have a strong factor structure as the testing assets and use more robust methods to estimate firm-specific exchange rate sensitivity. Our findings therefore suggest that researchers need to take a new perspective on exchange rate risk