Asset Returns and Economic Risk

The capital asset pricing model (CAPM), favored by financial researchers and practitioners fifteen years ago, holds that the extra return on a risky asset comes from bearing market risk only. But newer evidence supports the intertemporal CAPM (I-CAPM) theory (Merton 1973), which suggests that the premium on any risky asset is related not only to market risk but also to additional economic variables. This article reviews and interprets recent advances in the asset pricing literature. The study seeks to shed light on the sources of economic risk that investors should track and hedge against and the sign of the risk premia commanded by economic and financial risks. The author empirically measures the impact of prespecified financial and economic variables on the risk-return trade-off by looking at how they affect (or predict) the mean and the variance of asset returns. The analysis shows that variables such as the market portfolio, the term structure, the default premium, and the consumption-aggregate wealth ratio positively affect average asset returns and command positive risk premia while the inflation portfolio negatively affects returns and commands a negative premium. The article also provides extensive evidence of time variation in economic risk premia, showing that expected compensation for bearing different sorts of risk is larger at some times and smaller at others depending on economic conditions

The News in Financial Asset Returns

The notion that financial asset returns are predictors of future economic activity is widespread, but detailed analyses provide little support for financial markets ability to reveal future economic activity. Even though the evidence on various indicators used by different researchers is mixed, the authors of this article explore the notion that financial markets reveal useful information about future economic activity. This article examines and answers two questions: First, what is a good way of extracting information about future economic activity from asset prices? Second, do financial asset returns help predict economic activity over horizons from one month to five years? To determine whether news of an assets excess return can reveal information about unexpected economic activity, the authors construct a method of extracting the news about future economic activity from returns on financial assets. The authors use linear regressions to relate the unexpected parts of economic activity and the assets return to actual economic activity and the actual return on an asset. The evidence in the article shows that movements in financial markets do presage developments in the economy. The authors find that movements in the overall stock market and bond returns are the most important financial indicators. It remains to be seen whether those indicators hold up to variations in technique or the passage of time

Financial Market Frictions

Defined simply as anything that interferes with trade, financial market frictions can exist even in efficient markets. Understanding financial market frictions is important, this article argues, because they generate real costs to investors, because they generate business opportunities, and because they change over time. Financial market frictions depend in part on market structure. Market structure tends to evolve over time, as trading volume increases, from low fixed costs and high marginal costs to high fixed costs and low marginal costs. To help identify the best means of reducing market frictions costs, the authors classify and discuss five primary categories of frictions: transactions costs, taxes and regulations, asset indivisibility, nontraded assets, and agency and information problems. Looking for evidence of how frictions influence market participants behavior, the authors not only review the economic literature but also conduct an empirical exercise to illustrate and quantify frictions impact on investors risk-return trade-off. Their results show that market frictions impose utility costs on investors by making preferable investment portfolios unattainable. Their findings and other academic studies also suggest that investors who ignore market frictions compound the harm done by the frictions themselves

Asset Pricing Theories, Models, and Tests

An important but still partially unanswered question in the investment field is why different assets earn substantially different returns on average. Financial economists have typically addressed this question in the context of theoretically or empirically motivated asset pricing models. Since many of the proposed “risk” theories are plausible, a common practice in the literature is to take the models to the data and perform “horse races” among competing asset pricing specifications. A “good” asset pricing model should produce small pricing (expected return) errors on a set of test assets and should deliver reasonable estimates of the underlying market and economic risk premia. This chapter provides an up-to-date review of the statistical methods that are typically used to estimate, evaluate, and compare competing asset pricing models. The analysis also highlights several pitfalls in the current econometric practice and offers suggestions for improving empirical tests

Experimental research on electric propulsion. Note 5: Experimental study of a magnetic field stabilized arc-jet

The possibility of using an electric arc under the influence of a magnetic field in ambient air to transform the heat energy of the working fluid arc into the kinetic energy of the jet was investigated. A convergent-divergent type nozzle was used. Variation of specific thrust and chamber pressure are discussed. Nitrogen was the propellant used

Experimental research on electric propulsion. Note 7: Analysis of the performance of an arc-jet driven by means of hydrogen and nitrogen

Experiments which use a new type of arc-jet, characterized by composite electromagnetic and vortex stabilization and propelled by hydrogen and nitrogen in turn are described. The electrical characteristics of the arc and the loss of heat through the electrodes is emphasized

The Exact Distribution of the Hansen-Jagannathan Bound

Under the assumption of multivariate normality of asset returns, this paper presents a geometric interpretation and the finite-sample distributions of the sample Hansen–Jagannathan bounds on the variance of admissible stochastic discount factors, with and without the nonnegativity constraint on the stochastic discount factors. In addition, since the sample Hansen–Jagannathan bounds can be very volatile, we propose a simple method to construct confidence intervals for the population Hansen–Jagannathan bounds. Finally, we show that the analytical results in the paper are robust to departures from the normality assumption

Experimental research on electrical propulsion. Note 2: Experimental research on a plasma jet with vortex type stabilization for propulsion

Results of experimental electric propulsion research are presented. A plasma generator, with an arc stabilized by an air vortex is examined. The heat transfer efficiency between arc and fluid environment at a varying current and flow rate is discussed

Experimental research on electrical propulsion

This paper describes work on arcs rotating in a magnetic field. Particular care was taken about the design of the electrodes in order to achieve long-time operation. Successful performance tests were carried out