On stable factor structures in the pricing of risk: do time-varying betas help or hurt?

Article Abstract:

There is now considerable evidence suggesting that evidence betas of unconditional capital asset pricing models (CAPMs) exhibit statistically significant time variation. Therefore, many have advocated the use of conditional CAPMs. If we succeed in capturing the dynamics of beta risk, we are sure to outperform constant beta models. However, if the beta risk is inherently misspecified, there is a real possibility that we commit serious pricing errors, potentially larger than with a constant traditional beta model. In this paper we show that this is indeed the case, namely that pricing errors with constant traditional beta models are smaller than with conditional CAPMs. (Reprinted by permission of the publisher.)

Capital assets

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Number of shareholders and stock prices: evidence from Japan

Article Abstract:

Merton (1987) proposes that an increase in a firm's investor base increases the firm's value. In Japan, companies can reduce their stock's minimum trading unit - the number of shares in a "round lot" - which facilitates trading in the stock by small investors. We find that a reduction in the minimum trading unit greatly increases a firm's base of individual investors and its stock liquidity, and is associated with a significant increase in the stock price. Further, the stock price appreciation is positively related to an increase in the number of shareholders. (Reprinted by permission of the publisher.)

Japan, Stockholders, Securities, Stock prices

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The effects of beta, bid-ask spread, residual risk, and size on stock returns

Article Abstract:

Merton's (26) recent extension of the CAPM proposed that asset returns are an increasing function of their beta risk, residual risk, and size and a decreasing function of the public availability of information about them. Associating the latter with asset liquidity and following Amihud and Mendelson's (2) proposition that asset returns increase with their illiquidity (measured by the bid-ask spread), we jointly estimate the effects of these four factors on stock returns. (Reprinted by permission of the publisher.)

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