Market Risk Factors
Friday, Jan. 7, 2022 10:00 AM - 12:00 PM (EST)
- Chair: Hanno Nico Lustig, Stanford University
Duration-Based Stock Valuation: Reassessing Stock Market Performance and Volatility
AbstractUsing a panel of international government bond data, I construct fixed income portfolios that match the duration of the dividend strips of the local aggregate stock market index. I find that these bond portfolios have performed as well as their stock counterparts in the past half century while exhibiting similar (or even higher) levels of volatility. These results provide a novel perspective on both the equity risk premium and excess volatility puzzles (bubbles). I present several potential explanations, and discuss further the implications for macroeconomics, monetary economics, asset pricing, and corporate finance. The results can not be explained by net stock repurchases.
More than 100% of the Equity Premium: How Much Is Really Earned on Macroeconomic Announcement Days?
AbstractOne can earn well over 100% of the equity premium on macroeconomic announcement days identified by the prior literature. Inadvertent sample selection combined with announcements clustering at times of known seasonalities produce this too-much-return puzzle. Including all monthly announcement series eliminates this sample selection bias. Day-of-the-month fixed effects control for the announcement clustering. Macroeconomic announcements as a whole are responsible for about half of the equity premium. This smaller premium earned over more days means Sharpe ratios are similar on announcement and non-announcement days. Simulations show the observed concentrations of the equity premium in a few announcement series, e.g., FOMC, ex-post is likely even when those series are ex-ante identical to all others. A higher CAPM slope on macroeconomic announcement days is not evidence that those days are special. It is a mechanical result of high ex-post market returns.
Federal Reserve Bank of Chicago
University of Chicago
University of California-Los Angeles
- G0 - General