Can the Cross-Sectional Variation in Expected Stock Returns Explain Momentum?

To be published in Journal of financial and quantitative analysis, 200

A contingent claims analysis of optimal investment subsidy

This paper uses contingent claims analysis to answer two questions: (i) why are some subsidy markets apparently slow in attracting an optimal subsidy when others are not, and (ii) what can be done about it? The lack of activity in the green investment subsidy markets has been a concern as it appears optimal that countries should offer such support from a welfare point of view but progress has nonetheless been stalling, which motivates this paper. We show that free riding (which is likely to affect the green subsidy market) cools down the subsidy market with harmful welfare effects, and preemption (which is likely to affect the more active FDI subsidy market) overheats the subsidy market with similarly harmful effects. The theory dictates a taxation scheme that offsets these effects to restore the welfare to its maximum point

Can behavioral biases explain the rejections of the expectation hypothesis of the term structure of interest rates?

We test whether the rejections of the expectations hypothesis can be explained by two behavioral biases: the law of small numbers and conservatism. We use the term structure to decompose excess bond returns into components related to expectation errors and expectation revisions, enabling a direct test of behavioral models using the expectations of market participants. We find systematic patterns in expectation errors, and expectation revisions, which are consistent with these two biases. We show that a trading strategy that exploits these biases delivers significant economic profits and that our results are unlikely to be driven by a time-varying risk premium

Can the Cross-Sectional Variation in Expected Stock Returns Explain Momentum?

AbstractIt has been hypothesized that momentum might be rationally explained as a consequence of the cross-sectional variation of unconditional expected returns. Stocks with relatively high unconditional expected returns will on average outperform in both the portfolio formation period and in the subsequent holding period. We evaluate this explanation by first removing unconditional expected returns for each stock from raw returns and then testing for momentum in the resulting series. We measure the unconditional expected return on each stock as its mean return in the whole sample period. We find momentum effects vanish in demeaned returns.</jats:p

Revisiting the expectations hypothesis of the term structure of interest rates

The expectations hypothesis of the term structure has been decisively rejected in a large empirical literature that spans several decades. In this paper, using a newly constructed dataset of synthetic zero-coupon bond yields, we show that evidence against the expectations hypothesis is substantially weaker in data generated after the widespread publicity of its failure. These results are consistent with the idea that asset pricing anomalies tend to disappear once they are widely recognized.Expectations hypothesis of the term structure of interest rates Forward yields Yield spreads Campbell and Shiller tests Vector autoregression

Revisiting the Expectations Hypothesis of the Term Structure of Interest Rates

Abstract The expectations hypothesis of the term structure has been decisively rejected by a large empirical literature that spans several decades. In this paper, using a newly constructed dataset of synthetic zero coupon bond yields, we show that evidence against the expectations hypothesis became very much weaker following the widespread acceptance of its empirical failure to describe the behavior of interest rates in the early 1990s. Indeed, in the period 1991-2004, the expectations hypothesis cannot be rejected for most bond maturities. These results are consistent with the idea that asset pricing anomalies tend to disappear once they are widely recognized