Theory that some liked volatility not an equilibrium theory Pre ‘behavioral finance’ popularity No fancy empirical test (didn’t use GMM) Makes no sense—arbitrage [I took equity risk premium as given] Theory more important than data Burned by calendar effects
Ang,, Hodrick, Xing and Zhang (JoF 2009) 1980-2003 Use Fama French Model
Penman, Richardson, and Tuna. 2007 Debt/Equity Expected Returns rDrD rErE Theory
Beta and Returns Unremarkable Russ Wermers JoF 2000 piece (persistence, turnover) Burton Malkiel JoF 1995 piece (persistence, alpha) Carhart JoF 1997 (persistence, momentum) Beta irrelevant The biggest criticism is not adverse statements, but neglect
Return in AUD=Return in Yen+Appreciation in Yen/AUD % change in currency unpredictable
1990-2008 Dollar Annualized Returns, Standard Deviations Morgan Stanley Capital International (MSCI) MSCI Emerging Markets Index: 7.3%, 35% MSCI World (Developed) Index: 4.4%, 19%
Dimson, Marsh, Staunton (2005) 17 Countries, 1900-2005, Annual Data
No Return Premium to High Yield Bonds over Investment Grade Merrill High Yield Master II (HOAO) Merrill BBB-AA Index (COCO) 20 HY Funds, 12 IG funds
1% premium from 0.25 to 3 years No premium from 5 to 30 years Volatility, Covariance, increasing linearly
Futures return from roll Harvey and Erb (2007) copper, heating oil, and live cattle were on average in backwardization, corn, wheat, silver, gold, and coffee were in contango What covariance, volatility has to do with this ???
Campbell, Hilscher, and Szilagyi (2006) Find high distress firms have lower returns Source: Author. Data from Moody’s, S&P, Compustat
Longshot bias Horse Track: 1-10 odd horses 3% average return on investment 100-1 odd horses have -86% average return Bias not there in smaller odds, as in baseball
Devany and Walls (1999), 2015 movies from 1984-96
Steve Sharpe and Gene Amromin (2005). People have higher expected returns when they have lower expected volatilities Most studies find no positive aggregate volatility/return correlation over time
IPO has a lot of Uncertainty Jay Ritter (see his website). 1980-2008. IPO Returns -3.7% annually below size-matched firms for first 5 years
Deither, Malloy, and Scherbina (2002). Table 2. Data from 1983-2000. Data ‘strongly reject the interpretation of dispersion in analysts’ forecasts as a measure of risk’
Turnover of stock a proxy for disagreement Highly correlated with beta
Equity Over time Across Countries BBB to B bond returns Futures Currencies Private Investments Movies Mutual Funds Low Odds Sport Bets
Initial story was about total volatility Total volatility flat or negatively correlated with return Beta flat or negatively correlated with return unrelated to risk. Volatility, Beta Uncorrelated, negatively correlated, with ‘true’ betas ???
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