Diagnosing asset pricing models using the distribution of asset returns

Article Abstract:

This paper develops a set of diagnostic tests which can shed light on why a particular model is failing and indicate what steps might be taken to make the model consistent with asset returns. Theoretical bounds on the moments of a stochastic discount factor are derived as a function of the moments of observed asset returns. Particular attention is paid to restrictions on moments other than the variance. These bounds can also be used to measure the information about the distribution of the discount factor contained in the moments of various asset returns. As an application of this methodology, bounds on the discount factor are estimated using size-based portfolios, and the results are used to analyze the small firm effect. Empirical results indicate, for the period 1926-1975, that moments of the returns of small firms contain information about the discount factor that is not contained in the moments of the returns of large firms and/or a proxy of the aggregate wealth portfolio. However, this difference disappears when more recent data is included. (Reprinted by permission of the publisher.)

Small business, Securities, Capital assets pricing model, Capital asset pricing model

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Time variation of ex-dividend day stock returns and corporate dividend capture: a reexamination

Article Abstract:

Research indicates that ex-day returns tend to be more negative when tax benefits of corporate dividend capture is largest, and they tend to be more positive when risk and transaction cost increases lower incentives to engage in corporate dividend capture. Also, average abnormal ex-dividend day returns were found to be negative in every year after negotiated commission rates were introduced, with time variation consistent with dividend capture.

Dividend Policy, Economic aspects, Dividends, Tax incentives, Dividend reinvestment

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Order flow, transaction clock, and normality of asset returns

Article Abstract:

A stochastic time change model is used to recover normality of asset returns. This model is superior to the subordinated process, as it is less constraining mathematically than subordinators, and that the stochastic clock composed of cumulative trade figures generates perfect normality and can be depicted nonparametrically.

Asset & Risk Management, Models, Stochastic analysis, Stochastic processes, Asset-backed securities, Asset backed securities

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