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Many investors and institutions have a long-run investment perspective, hence the question of stocks versus bonds in the long-run is of central importance. Despite the great deal of research attention devoted to this issue, views remain conflicting. Indeed, neither stocks nor bonds dominate when...
Persistent link: https://www.econbiz.de/10012847616
Asness et. al. (2018) recently resurrect the size effect, concluding that it “…should be restored as one of the central cross-sectional empirical anomalies for asset pricing theory to explain”. We suggest a theoretical explanation for the size effect, based on the observation that many...
Persistent link: https://www.econbiz.de/10012871783
Under the assumption of normally distributed returns, we analyze whether the Cumulative Prospect Theory of Tversky and Kahneman (1992) is consistent with the Capital Asset Pricing Model. We find that in every financial market equilibrium, the Security Market Line Theorem holds. However, under...
Persistent link: https://www.econbiz.de/10012713549
Markowitz and Sharpe won the Nobel Prize in Economics for the development of Mean-Variance (M-V) analysis and the Capital Asset Pricing Model (CAPM). Kahneman won the Nobel Prize in Economics for the development of Prospect Theory. In deriving the CAPM, Sharpe, Lintner and Mossin assume expected...
Persistent link: https://www.econbiz.de/10012714905
Mean-Variance (M-V) analysis and the CAPM are derived in the expected utility framework. Behavioral Economists and Psychologists (BEamp;P) advocate that expected utility is invalid, suggesting Prospect Theory as a substitute paradigm. Moreover, they show that the M-V rule, which is the...
Persistent link: https://www.econbiz.de/10012718610
Value-at-Risk (VaR) has become a standard measure for risk management and regulation. In the case of a two-parameter distribution, a common method among practitioners is first to calculate the daily VaR and then to apply it to a longer investment horizon by using the Square Root Rule (SRR). We...
Persistent link: https://www.econbiz.de/10012706324
The average after-tax real interest rate on U.S. T-bills and the average rate of return on long-term government bonds (LTGB) have been negative over the last 75 years. Is this negative rate an equilibrium phenomenon or simply an empirical fluke? We show that a negative equilibrium interest rate...
Persistent link: https://www.econbiz.de/10012786662
Empirically, co-skewness of asset returns seems to explain a substantial part of the cross-sectional variation of mean return not explained by beta. Thisfinding is typically interpreted in terms of a risk averse representativeinvestor with a cubic utility function. This comment questions...
Persistent link: https://www.econbiz.de/10012762818
When two random variables are both additive or multiplicative, the effect of the way one quot;slicesquot; the available period to subperiods (time intervals) is well documented in the literature. In this paper, we investigate the time interval effect when one of the variables is additive and one...
Persistent link: https://www.econbiz.de/10012776498
The home bias is typically explained by various extra costs for foreign investments, such as higher transaction costs and information asymmetries. These costs have dramatically decreased over the last 15 years: the internet has revolutionized the global flow of information, accounting reports...
Persistent link: https://www.econbiz.de/10013079849