Asset Pricing Zheng Zhenlong Ch3. Contingent Claims Markets 18:18.
Asset Pricing Zheng Zhenlong Price change: cash flow or discount rate? 06:49 1.
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Transcript of Asset Pricing Zheng Zhenlong Price change: cash flow or discount rate? 06:49 1.
Asset Pricing
Zheng Zhenlong
Price change: cash flow or discount rate?
01:51
1
Asset Pricing
Zheng ZhenlongWhy do prices vary so much?
Asset Pricing
Zheng Zhenlong
Asset Pricing
Zheng ZhenlongIntroduction
• 1970s view:Expected returns don’t move much over
time — stocks are unpredictable.Prices move on news of cashflow
(dividend).CAPM works pretty well.Beta derives from the covariance of
cashflows with market cashflows.
01:51
Asset Pricing
Zheng ZhenlongIntroduction
• All are dramatically different now.1. Expected returns move a lot over time — stocks are predictable. (Long run, business cycle correlation)2. Prices move on news of discount rate changes.3. We understand the cross-section with multifactor models.
(a) A larger number of characteristics other than beta are associated with expected returns(b) To the extent we understand those patterns, expected returns line up with nonmarket betas
Asset Pricing
Zheng ZhenlongIntroduction
4. Betas derive from the covariance of discount rates with market discount rates. 5. Facts are pushing us to the “risk premium” view of the world, as opposed to the “constant expected return, cashflow” view from the 1970s. 6. These are the facts underlying theoretical modeling.
Asset Pricing
Zheng ZhenlongOld Facts
Asset Pricing
Zheng ZhenlongNew View of facts
Asset Pricing
Zheng Zhenlong
Why D/P forecasts long horizon returns?
Asset Pricing
Zheng Zhenlong
Predictability of Dividend growth
• P/D “should” forecast a dividend rise. Price high relative to current dividends should mean that future dividends will be higher.
• Dividend growth is not predictable! The point estimates are the “wrong” sign!
Asset Pricing
Zheng Zhenlong
Do “low” prices mean / reveal high returns?
Asset Pricing
Zheng Zhenlong
“Predictability” ↔ time-varying expected returns
Asset Pricing
Zheng ZhenlongInefficiency?
• Does this mean markets are “inefficient”? Is this an invitation to “buy low and sell high?”
• Not necessarily. Time varying risk premia are possible.
• Are expected returns higher in good times or in bad times? (Bad, why?) business-cycle related time-varying risk premium is certainly possible.
Asset Pricing
Zheng Zhenlong
Campbell-Shiller linearization of the one-period return
• 小写字母代表大写字母的对数• Intuition: higher returns come from higher prices
(higher valuations p-d), lower initial prices, or higher dividends.
Asset Pricing
Zheng Zhenlong
The Campbell-Shiller present value identity
• If both Δd and r are unforecastable, p−d is constant. If p-d varies at all, something must be forecastable. The fact that d-p varies means that we do not live in an iid world. (Plus no bubbles)
Asset Pricing
Zheng Zhenlong
Asset Pricing
Zheng ZhenlongA Pervasive Phenomenon
• Stocks. Dividend yields forecast returns, not dividend growth.
• Treasuries. A rising yield curve signals better 1-year returns for long-term bonds, not higher future interest rates. Fed fund futures signal returns, not changes in the funds rate.
• Bonds. Much variation in credit spreads over time and across firms or categories signals returns, not default probabilities.
• Foreign exchange. International interest rate spreads signal returns, not exchange rate depreciation.
• Houses. High price/rent ratios signal low returns, not rising rents or prices that rise forever.
Asset Pricing
Zheng Zhenlong
Asset Pricing
Zheng Zhenlong
Common element: business cycle
• low prices, high returns in recessions. High prices, low returns in booms
Asset Pricing
Zheng Zhenlong
Multivariate Challenges: More variables
Asset Pricing
Zheng Zhenlong
Understanding prices: short and long-run forecasts
• Cay:消费财富比率
Asset Pricing
Zheng ZhenlongThe cross section
5
Asset Pricing
Zheng ZhenlongValue effect and factor
Asset Pricing
Zheng Zhenlong
Value (size, and bond factors)
Asset Pricing
Zheng Zhenlong
The Multidimensional Challenge
(Market, value, size), momentum, accruals, equity issues, beta-arbitrage, credit risk, bond & equity market timing, carry trade, put writing, “liquidity provision,”...1. Which of these are independently important for E(Re )?(“multiple regression”)2. Does E(Re ) spread correspond to new factors?3. Do we need all the new factors? Or again, fewer factors thanE(Re ) characteristics?4. Why do prices move? –Long run.
How to approach such a highly multidimensional problem?
Asset Pricing
Zheng Zhenlong
Asset Pricing on Characteristics/Uni…cation
1. Portfolio sorts are really cross-sectional regressions
Asset Pricing
Zheng Zhenlong
Asset Pricing on Characteristics/Uni…cation
Asset Pricing
Zheng Zhenlong
Theory classifi…cation
Asset Pricing
Zheng ZhenlongConsumption/habits
Asset Pricing
Zheng ZhenlongInvestment and Q
Asset Pricing
Zheng ZhenlongChallenges for theories
Pervasive, coordinated risk premium in all markets, especially unintermediated
Mean returns are associated with comovement. Strong correlation with macroeconomics
Asset Pricing
Zheng Zhenlong“Arbitrages”
Asset Pricing
Zheng Zhenlong“Arbitrages”
Asset Pricing
Zheng Zhenlong
Price and volume in the tech “bubble
Asset Pricing
Zheng ZhenlongBonds : a cautionary tale�
Asset Pricing
Zheng Zhenlong
Stocks (your endowment) in the crisis
Asset Pricing
Zheng Zhenlong
Alphas, betas, and performance evaluation
• A hedge fund manager said, “‘Exotic beta’ is my alpha. I understand those systematic factors and know how to trade them. My clients don’t.”
Asset Pricing
Zheng ZhenlongConclusion
Discount rates vary over time and across assets a lot more than you thought
Empirical: how. Theoretical: why. Applications: at all.
We’ve only started� How do you ask the right question?
Asset Pricing
Zheng Zhenlong