Asset pricing at the millennium

Article Abstract:

A survey of asset pricing emphasizing how theory interacts with empirical practice is presented. Stochastic discount factor (SDF) is used to price all assets in today's economy and is a key focus of modern economic research; its conditional mean is restricted by the behavior of interest-rate term structure, while its volatility and factor structure are controlled and restricted by risk premia patterns. New research tends to focus on behavioral finance as well as creating models of intertemporal equilibrium; the largest practical application is optimization of portfolio selection. Theorists develop economic models which can then be tested by empirical researchers through the documentation of stylized facts

Science & research, Capital funds & cash flow, Usage, Stochastic analysis, Assets (Accounting)

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Stock prices, earnings, and expected dividends

Article Abstract:

Long historical averages of real earnings help forecast present values of future real dividends. With aggregate U.S. stock market data (1871-1986), a vector-autoregressive forecast of the present value of future dividends is, for each year, roughly a weighted average of moving-average earnings and current real price, with between two thirds and three fourths of the weight on the earnings measure. We develop the implications of this for the present-value model of stock prices and for recent results that long-horizon stock returns are highly forecastable. (Reprinted by permission of the publisher.)

Analysis, Finance, Stocks, Corporations, Stock prices, Corporate finance, Return on investment, Rate of return, Financial research

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Explaining the poor performance of consumption-based asset pricing models

Article Abstract:

Issues related to the limitations of consumption-based asset pricing theory are examined, focusing on a comparison between the consumption-based models and a portfolio-based model. Topics include the need to incorporate time-varying conditions in models and the continued reliability of consumption-based models for analyzing deep economic forces.

United States, Legislative Bodies, Finance, Statistical Data Included, Prices, Consumption (Economics)

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