Finance Research Works

Permanent URI for this collectionhttp://hdl.handle.net/1903/1589

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    An Exact Bayes Test of Asset Pricing Models with Application to International Markets
    (Journal of Business of the University of Chicago, 2006) Avramov, Doron; Chao, John C.
    This paper develops and implements an exact finite-sample test of asset pricing models with time varying risk premia using posterior probabilities. The strength of our approach is that it allows multiple conditional asset pricing specifications, both nested and non-nested, to be tested and compared simultaneously. We apply our procedure to international equity markets by testing and comparing the international CAPM and conditional ICAPM versions of Fama and French (1998). The empirical evidence suggests that the best performing model is the ICAPM with the value premium constructed based on global earnings-to-price ratio.
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    Rationalizing Momentum Interactions
    (2007) Avramov, Doron; Hore, Satadru
    Momentum profitability concentrates in high information uncertainty and high credit risk firms and is virtually nonexistent otherwise. This paper rationalizes such momentum interactions in equilibrium asset pricing. In our paradigm, dividend growth is mean reverting, expected dividend growth is stochastic and highly persistent, the representative agent is endowed with stochastic differential utility of Duffie and Epstein (1992), and leverage, which proxies for credit risk, is modeled based on the Abel's (1999) formulation. Using reasonable risk aversion levels we produce the observational momentum effects. In particular, momentum profitability is especially high in the interaction between high levered and risky cash flow firms. It rapidly deteriorates and ultimately disappears as leverage or cash flow risk diminishes.