Asset Pricing with a Reference Level of Consumption: New Evidence from the Cross-Section of Stock Returns

This paper presents an empirical evaluation of recently proposed asset pricing models which extend the standard preference specification by a reference level of consumption. We motivate an alternative model that accounts for the return on human capital as a determinant of the reference level. Our analysis is based on a broad cross-section of test assets which provides a level playing field for a comparison to established benchmark models. The human capital extended reference level model does a good job in explaining size and value premia. Estimated on Fama and French's size and book-to-market sorted portfolios it outperforms Lettau and Ludvigson's scaled CCAPM and delivers average pricing errors comparable to the Fama-French three-factor model. --Consumption-Based Asset Pricing,Cross-Section of Stock Returns,Reference Level

International price discovery in the presence of microstructure noise

This paper addresses and resolves the issue of microstructure noise when measuring the relative importance of home and U.S. market in the price discovery process of Canadian interlisted stocks. In order to avoid large bounds for information shares, previous studies applying the Cholesky decomposition within the Hasbrouck (1995) framework had to rely on high frequency data. However, due to the considerable amount of microstructure noise inherent in return data at very high frequencies, these estimators are distorted. We offer a modified approach that identifies unique information shares based on distributional assumptions and thereby enables us to control for microstructure noise. Our results indicate that the role of the U.S. market in the price discovery process of Canadian interlisted stocks has been underestimated so far. Moreover, we suggest that rather than stock specific factors, market characteristics determine information shares

Creative destruction and asset prices

This paper introduces Schumpeter's idea of creative destruction into asset pricing. The key point of our model is that small and value firms are more likely destroyed during technological revolutions, resulting into higher expected returns for these stocks. A two-factor model including market return and patent activity growth - the proxy for creative destruction risk - accounts for a large portion of the cross-sectional variation of size and book-to-market sorted portfolios and prices HML and SMB. The expected return difference between assets with the highest and lowest exposure to creative destruction risk amounts to 8.6 percent annually. --creative destruction,asset pricing,size and value premium,patents

Consumption-Based Asset Pricing with a Reference Level: New Evidence from the Cross-Section of Stock Returns

This paper presents an empirical evaluation of recently proposed asset pricing models which extend the standard preference specification by a reference level of consumption. The novelty is that we use a broad cross-section of test assets, which provides a level playing field for a comparison to well-established benchmark models. We also motivate a specification that accounts for the return on human capital as a determinant of the reference level. We find that this extension does a good job in explaining the cross-sectional variation in average returns across the 25 Fama- French portfolios with pricing errors close to those of Lettau/Ludvigson's celebrated scaled factor models. --Consumption-based Asset Pricing,Cross-Section of Stock Returns,Reference Level

The econometrics of airline network management

The task of airline network management is to develop new flight schedule variants and evaluate thm in terms of expected passenger demand and revenue. Given the industry's trend towards global cooperation, this is especially important when evaluating the potential synergies with alliance partners. From the econometric point of view, this task represents a discrete choice modeling problem in which the analyst has to account for a large number of dependent alternatives. In this paper we discuss the applicability of recently proposed approaches and introduce a new multinomial probit specification designed for the airline network management task. The superior performance of the new model is demonstrated both in a simulation study and in a real-world application using airline bookings data

Tell-tale tails: A data driven approach to estimate unique market information shares

The trading of securities on multiple markets raises the question of each market's share in the discovery of the informationally efficient price. We exploit salient distributional features of multivariate financial price processes to uniquely determine these contributions. Thereby we resolve the main drawback of the widely used Hasbrouck (1995) methodology which merely delivers upper and lower bounds of a market's information share. When these bounds diverge, as is the case in many applications, informational leadership becomes blurred. We show how fat tails and tail dependence of price changes, which emerge as a result of differences in market design and liquidity, can be exploited to estimate unique information shares. The empirical application of the new methodology emphasizes the leading role of the credit derivatives market compared to the corporate bond market in pricing credit risk during the pre-crisis period. --price discovery,information share,fat tails,tail dependence,liquidity,credit risk

International price discovery in the presence of market microstructure effects

This paper addresses and resolves the problems caused by microstructure effects when measuring the relative importance of home and U.S. market in the price discovery process of internationally cross listed stocks. In order to avoid large bounds for information shares, previous studies applying the Cholesky decomposition within the Hasbrouck (1995) framework had to rely on high frequency data. However, this entails a potential bias of estimated information shares induced by microstructure effects. We propose a modified approach that relies on distributional assumptions and yields unique and unbiased information shares. Our results indicate that the role of the U.S. market in the price discovery process of Canadian interlisted stocks has been severely underestimated to date. Moreover, we find that rather than stock specific factors, market design determines information shares. --international cross-listings,market microstructure effects,price discovery

Commonalities in the order book

Recent contributions to microstructure theory hint a commonalities in the price-depth pairs which constitute the open limit order book. In this paper we provide empirical evidence that indeed a small number of latent factors, two for each side of the book, capture most of the variation the price-depth pairs. The results also indicate that a heterogeneous trader population is active on the buy and sell sides. The respective latent factors explaining the by and sell side variation exhibit specific dynamics. When we exploit results from microstructure theory to empirically assess whether the majority of the book variation is due to either informational effects or non-informational fluctuations of liquidity we obtain mixed results.limit order book; commonalities; liquidity; market microstructure

Asset Pricing with a Reference Level of Consumption : New Evidence from the Cross-Section of Stock Returns

[Überarbeitete Version, ursprünglicher Titel: Consumption-Based Asset Pricing with a Reference Level: New Evidence from the Cross-Section of Stock Returns] This paper presents an empirical evaluation of recently proposed asset pricing models which extend the standard preference specifcation by a reference level of consumption. We motivate an alternative model that accounts for the return on human capital as a determinant of the reference level. Our analysis is based on a broad cross-section of test assets which provides a level playing field for a comparison to established benchmark models. The human capital extended reference level model does a good job in explaining size and value premia. Estimated on Fama and French's size and book-to-market sorted portfolios it outperforms Lettau and Ludvigson's scaled CCAPM and delivers average pricing errors comparable to the Fama-French three-factor model