A Critique of the Stochastic Discount Factor Methodology

In this paper, we point out that the widely used stochastic discount factor (SDF) methodology ignores a fully specified model for asset returns. As a result, it suffers from two potential problems when asset returns follow a linear factor model. The first problem is that the risk premium estimate from the SDF methodology is unreliable. The second problem is that the specification test under the SDF methodology has very low power in detecting misspecified models. Traditional methodologies typically incorporate a fully specified model for asset returns, and they can perform substantially better than the SDF methodology.

What Determines Expected International Asset Returns?

This paper characterizes the forces that determine time-variation in expected international asset returns. We offer a number of innovations. By using the latent factor technique, we do not have to prespecify the sources of risk. We solve for the latent premiums and characterize their time-variation. We find evidence that the first factor premium resembles the expected return on the world market porfolio. However, the inclusion of this premium alone is not sufficient to explain the conditional variation in the returns. We find evidence of a second factor premium which is related to foreign exchange risk. Our sample includes new data on both international industry portfolios and international fixed income portfolios. We find that the two latent factor model performs better in explaining the conditional variation in asset returns than a prespecified two factor model. Finally, we show that differences in the risk loadings are important in accounting for the cross-sectional variation in the international returns.International investment, Asset pricing, Latent variables, Exchange rate risk, Factor models

What Determines Expected International Asset Returns?

This paper characterizes the forces that determine time-variation in expected international asset returns. We offer a number of innovations. By using the latent factor technique, we do not have to prespecify the sources of risk. We solve for the latent premiums and characterize their time-variation. We find evidence that the first factor premium resembles the expected return on the world market portfolio. However, the inclusion of this premium alone is not sufficient to explain the conditional variation in the returns. We find evidence of a second factor premium which is related to foreign exchange risk. Our sample includes new data on both international industry portfolios and international fixed income portfolios. We find that the two latent factor model performs better in explaining the conditional variation in asset returns than a prespecified two factor model. Finally, we show that differences in the risk loadings are important in accounting for the cross-sectional variation in the international returns.

Investment Horizon and the Cross Section of Expected Returns: Evidence from the Tokyo Stock Exchange

Using data from the Tokyo Stock Exchange, we study how beta, size, and ratio of book to market equity (BE/ME) account for the cross-section of expected stock returns over different lengths of investment horizons. We find that $\beta$, adjusted for infrequent trading or not, fails to explain the cross-section of monthly expected returns, but does a much better job for horizons over half- and one-year. However, either the size or the BE/ME alone is still a significant factor in explaining the cross-section expected returns, but the size significance diminishes for longer horizons when $\beta$ is included as an additional independent variable.Investment horizon, Beta, Size, Book-to-market equity, CAPM

Forecasting the equity risk premium: The role of technical indicators

Ministry of Education, Singapore under its Academic Research Funding Tier

Limited Participation and Consumption-Saving Puzzles: A Simple Explanation and the Role of Insurance

In this paper, we show that the existence of a large, negative wealth shock and insufficient insurance against such a shock could explain both the limited stock market participation puzzle and the low-consumption–high-savings puzzle. We then conduct an empirical analysis on the relation between household portfolio choices and access to private insurance and various types of government safety nets. The empirical results demonstrate that a lack of insurance against large, negative wealth shocks is positively correlated with lower participation rates and higher saving rates. Overall, the evidence suggests an important role of insurance in household investment and savings decisions

DC-bias for Optical OFDM in Visible Light Communications

The requirement of a DC-bias is known to make DC-biased Optical Orthogonal Frequency Division Multiplexing (DCO-OFDM) less energy efficient. This can be improved by Asymmetrically Clipped Optical OFDM (ACO-OFDM), Pulse Amplitude Modulated OFDM (PAM-OFDM) or Flip-OFDM, but these variants use the bandwidth inefficiently. Our trade-off between energy and spectrum efficiency considers a given limited channel bandwidth of the Light Emitting Diode (LED) and then attempts to get the highest throughput per unit of energy. We investigate previous findings that clipped OFDM can be more attractive in a low-SNR regime. More specifically, we consider Visible Light Communication (VLC) in which the average light level, i.e., the bias, is prescribed by illumination requirements, thus comes for free. ACO/PAM/Flip-OFDM can convert the DC-bias into power for communication, but all variants of OFDM, including DCO-OFDM consume extra electrical power. We conclude that in this scenario, advantages attributed to ACO/PAM/Flip-OFDM vanish, as DCO-OFDM outperforms its variants in all SNR conditions, in terms of achieved throughput over a bandlimited channel as a function of extra electrical power required. For hybrid solutions, such as Asymmetrically clipped DC biased Optical OFDM (ADO-OFDM) and Hybrid ACO-OFDM (HACO-OFDM), we optimize a new adaptive power and rate splitting between odd (clipped) and even (biased/clipped) subcarriers to balance power and bandwidth efficiency