International asset pricing and portfolio diversification with time-varying risk

Article Abstract:

We test the conditional capital asset pricing model (CAPM) for the world's eight largest equity markets using a parsimonious generalized autoregressive conditional heteroskedasticity (GARCH) parameterization. Our methodology can be applied simultaneously to many assets and, at the same time, accommodate general dynamics of the conditional moments. The evidence supports most of the pricing restrictions of the model, but some of the variation in risk-adjusted excess returns remains predictable during periods of high interest rates. Our estimates indicate that, although severe market declines are contagious, the expected gains from international diversification for a U.S. investor average 2.11 percent per year and have not significantly declined over the last two decades. (Reprinted by permission of the publisher.)

International aspects, Stock-exchange, Stock exchanges, Portfolio management, Capital assets pricing model, Capital asset pricing model

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Inflation, uncertainty, and investment

Article Abstract:

The effects of inflation on companies' investments in fixed assets are analyzed. The analysis shows that inflation can affect the current value of depreciation relative to fixed assets for which future prices are uncertain and that inflation affects asset life choices in a monotonic way. When future prices for corporate assets are uncertain, valuable accounting method switches are available to corporations, and assets with shorter lives prove to be more beneficial to the corporations when such uncertainty exists. In the discussion by Alan J. Auerbach following the research paper, it is argued that the standard of equal impact on demand prices may not be appropriate when applied to tax bases containing fixed assets.

Research, Conferences, meetings and seminars, Economic aspects, Investments, Risk management, Capital investments, American Finance Association

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Bond Systematic Risk and the Option Pricing Model

Article Abstract:

The relationship of systematic risk of corporate bonds to the bond, the issuer and the state of the capital markets is examined. Risk nonstationarity is considered. An understanding of options pricing leads to a better understanding of corporate liabilities. Changes in bond characteristics change the share of risk held by the bondholders.

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