Two Pillars of Asset Pricing Lecture for the Sveriges Riksbank Prize - PowerPoint PPT Presentation

Two Pillars of Asset Pricing Lecture for the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel Eugene F. Fama

Efficient Capital Markets A. Early Work B. Event Studies R it = a i + b i R Mt + e it

Figure 1 - Cumulative average residuals in the months surrounding a split 0,44 Cumulative average residual 0,33 0,22 0,11 0 -30 -25 -20 -15 -10 -5 0 5 10 15 20 25 30 Month relative to split month 0

C. Predictive Regressions i t+1 = E t ( r t+1 ) + E t ( π t+1 ) π t+1 = a + bi t+1 + ε t

D. Time-Varying Expected Stock Returns R t = a + bD/P t-1 + e it E. “Bubbles”

Asset Pricing Models A. Fama and MacBeth (1973) R it = a t + a 1t b i + a 2t MC i,t-1 + a 3t B / M i,t-1 + e it B. The Fatal Problems of the CAPM

The Three-Factor Model E( R it ) - R Ft = b i [E( R Mt ) – R Ft ] + s i E ( SMB t ) + h i E( HML t ) The regression used to test the model is, R it - R Ft = a i + b i ( R Mt – R Ft ) + s i SMB t + h i HML t + e it

Conclusions