Download Presentation Material - Spears School of Business

Boston College
Carroll School of Management
Empirical Asset Pricing:
Impressions and Lessons from a
20+ Year Journey
For the 2005 FMA Doctoral
Program
By:
Wayne Ferson
October, 2005
1
Boston College
Carroll School of Management
Overview
1. Some things I have learned (in 20+
years as an empirical asset pricer)
2. Some things I still wonder about (after
20+ years as an empirical asset pricer).
3. My “Top Ten.”
2
Boston College
Carroll School of Management
Things I have Learned
About Consumption
Models:
JFQA 83 – thesis
JFE 87 – Merrick
JFE 91 – Constantinides
JF 92 - Harvey
EER 93 – Braun, Constantinides
3
Boston College
Carroll School of Management
Things I have Learned
About Consumption
Models:
They Don’t Work
(they don’t even
calibrate).
JFQA 83 – thesis
JFE 87 – Merrick
JFE 91 – Constantinides
JF 92 - Harvey
EER 93 – Braun, Constantinides
4
Boston College
Carroll School of Management
Things I have Learned
About Consumption
Models:
JFQA 83 – thesis
JFE 87 – Merrick
JFE 91 – Constantinides
JF 92 - Harvey
EER 93 – Braun, Constantinides
They Don’t Work
(they don’t even
calibrate).
They have great
economic intuition.
5
Boston College
Carroll School of Management
Things I have Learned
About Conditional
/Multifactor CAPMs:
JFE 85 – Gibbons
JF 87 – Kandel and Stambaugh
JF 89,90
JPE 91 – Harvey
JF 93 – Foerster and Keim
JF 99 - Harvey
Mansci 98 – Locke
WP 05 - Siegel
6
Boston College
Carroll School of Management
Things I have Learned
About Conditional
/Multifactor CAPMs:
 They Don’t Work Very
Well.
JFE 85 – Gibbons
JF 87 – Kandel and Stambaugh
JF 89,90
JPE 91 – Harvey
JF 93 – Foerster and Keim
JF 99 - Harvey
Mansci 98 – Locke
WP 05 - Siegel
7
Boston College
Carroll School of Management
Things I have Learned
About Conditional
/Multifactor CAPMs:
 They Don’t Work Very
Well.
JFE 85 – Gibbons
JF 87 – Kandel and Stambaugh
JF 89,90
JPE 91 – Harvey
JF 93 – Foerster and Keim
JF 99 - Harvey
Mansci 98 – Locke
WP 05 - Siegel
 They are algebraically
Beautiful!
8
Boston College
Carroll School of Management
Things I have Learned
About Conditional
/Multifactor CAPMs:
 They Don’t Work Very
Well.
JFE 85 – Gibbons
JF 87 – Kandel and Stambaugh
JF 89,90
JPE 91 – Harvey
JF 93 – Foerster and Keim
JF 99 - Harvey
Mansci 98 – Locke
WP 05 - Siegel
 They are algebraically
Beautiful!
 Practitioners Really want
them!
9
Boston College
Carroll School of Management
Things I have Learned
About INTERNATIONAL
Conditional /Multifactor
CAPMs:
RFS 93 – Harvey
JBF 94 – Harvey
JBF 97 - Harvey
SEPR 98 - Harvey
10
Boston College
Carroll School of Management
Things I have Learned
About INTERNATIONAL
Conditional /Multifactor
CAPMs:
RFS 93 – Harvey
JBF 94 – Harvey
JBF 97 - Harvey
SEPR 98 - Harvey
They Don’t Work
Very Well, either.
 (See Above)
11
Boston College
Carroll School of Management
Things I have Learned
Conditional Performance
Evaluation and Mutual
Funds:
JF 96 - Schadt
FAJ 96 – Warther
RFS 98 – Christopherson and Glassman
JPM 99 – Christopherson and Turner
JFE 99 – Becker, Myers and Schill
JB 02 – Farnsworth, Jackson and Todd
JFE 02 – Khang
RFS 06 – Kisgen and Henry
WP 05 – Chen and Peters
WP 05 - Qian
12
Boston College
Carroll School of Management
Things I have Learned
Conditional Performance
Evaluation and Mutual
Funds:
 Conditioning Seems
to Work!
JF 96 - Schadt
FAJ 96 – Warther
RFS 98 – Christopherson and Glassman
JPM 99 – Christopherson and Turner
JFE 99 – Becker, Myers and Schill
JB 02 – Farnsworth, Jackson and Todd
JFE 02 – Khang
RFS 06 – Kisgen and Henry
WP 05 – Chen and Peters
WP 05 - Qian
13
Boston College
Carroll School of Management
Things I have Learned
Conditional Performance
Evaluation and Mutual
Funds:
 Conditioning Seems
to Work!
JF 96 - Schadt
FAJ 96 – Warther
RFS 98 – Christopherson and Glassman
JPM 99 – Christopherson and Turner
JFE 99 – Becker, Myers and Schill
JB 02 – Farnsworth, Jackson and Todd
JFE 02 – Khang
RFS 06 – Kisgen and Henry
WP 05 – Chen and Peters
WP 05 - Qian
 Some Portfolio
Managers Hate it!
14
Boston College
Carroll School of Management
Things I have Learned
About Empirical
Methods:
JFE 94 - Foerster
JFM 99 – Sarkissian and Simin
JF 03 – Sarkissian and Simin
RFS 03 - Siegel
Review chs: 95, 03
JFQA 06 – Siegel and Xu
Wp 05 - Siegel
15
Boston College
Carroll School of Management
Things I have Learned
About Empirical
Methods:
JFE 94 - Foerster
JFM 99 – Sarkissian and Simin
JF 03 – Sarkissian and Simin
RFS 03 - Siegel
Review chs: 95, 03
JFQA 06 – Siegel and Xu
Wp 05 - Siegel
 The Generalized
Method of Moments
(GMM): a workhorse!
16
Boston College
Carroll School of Management
Things I have Learned
About Empirical
Methods:
JFE 94 - Foerster
JFM 99 – Sarkissian and Simin
JF 03 – Sarkissian and Simin
RFS 03 - Siegel
Review chs: 95, 03
JFQA 06 – Siegel and Xu
Wp 05 - Siegel
 The GMM: a workhorse!
 Beautiful Combination
with Stochastic Discount
factors: E{mR}=1
“M-Talk!”
17
Boston College
Carroll School of Management
Things I have Learned
About Empirical
Methods:
 The GMM: a workhorse!
 E{mR}=1 “M-talk!”
JFE 94 - Foerster
JFM 99 – Sarkissian and Simin
JF 03 – Sarkissian and Simin
RFS 03 - Siegel
Review chs: 95, 03
JFQA 06 – Siegel and Xu
Wp 05 - Siegel
 HML sorts are tricky
(hard to distinguish from
data mining)!
18
Boston College
Carroll School of Management
Things I have Learned
About Empirical
Methods:
 The GMM: a workhorse!
 E{mR}=1 “M-talk!”
JFE 94 - Foerster
JFM 99 – Sarkissian and Simin
JF 03 – Sarkissian and Simin
RFS 03 - Siegel
Review chs: 95, 03
JFQA 06 – Siegel and Xu
Wp 05 - Siegel
 HML sorts hard to
distinguish from data
mining !
 Even a Simple Regression
might steer you wrong !
19
Boston College
Carroll School of Management
Things I have Learned
About How to “Play
the Game.”
Wharton, 81-83
Chicago, 83-92
Arizona State (V), 94,95,98
South Carolina (V), 98
U. Washington, 92-2001
Miami (V), 98
IAS Vienna (V), 99
Atlanta Fed (V), 2004
Boston College, 2001-
.
.
.
.
20
Boston College
Carroll School of Management
Things I have Learned
About How to “Play
the Game.”
Wharton, 81-83
Chicago, 83-92
Arizona State (V), 94,95,98
South Carolina (V), 98
U. Washington, 92-2001
Miami (V), 98
IAS Vienna (V), 99
Atlanta Fed (V), 2004
Boston College, 2001-
 Be valuable to your colleagues.
.
.
.
21
Boston College
Carroll School of Management
Things I have Learned
About How to “Play
the Game.”
Wharton, 81-83
Chicago, 83-92
Arizona State (V), 94,95,98
South Carolina (V), 98
U. Washington, 92-2001
Miami (V), 98
IAS Vienna (V), 99
Atlanta Fed (V), 2004
Boston College, 2001-
 Be valuable to your colleagues.
 Drill down, but keep your eye on the
Big Questions.
.
.
22
Boston College
Carroll School of Management
Things I have Learned
About How to “Play
the Game.”
Wharton, 81-83
Chicago, 83-92
Arizona State (V), 94,95,98
South Carolina (V), 98
U. Washington, 92-2001
Miami (V), 98
IAS Vienna (V), 99
Atlanta Fed (V), 2004
Boston College, 2001-
 Be valuable to your colleagues.
 Drill down, but keep your eye on the
Big Questions.
 Juggle the balls, but have FUN with
the work.
.
23
Boston College
Carroll School of Management
Things I have Learned
About How to “Play
the Game.”
Wharton, 81-83
Chicago, 83-92
Arizona State (V), 94,95,98
South Carolina (V), 98
U. Washington, 92-2001
Miami (V), 98
IAS Vienna (V), 99
Atlanta Fed (V), 2004
Boston College, 2001-
 Be valuable to your colleagues.
 Drill down, but keep your eye on the
Big Questions.
 Juggle the balls, but have FUN with
the work.
 Follow the “Golden Rule.”
24
Boston College
Carroll School of Management
Some Things I still Wonder about
(after 20+ years as an empirical asset pricer)
25
Boston College
Carroll School of Management
Some Things I still Wonder about
(after 20+ years as an empirical asset pricer)
• Why Do some stocks return more than others?
.
.
.
.
26
Boston College
Carroll School of Management
Some Things I still Wonder about
(after 20+ years as an empirical asset pricer)
• Why Do some stocks return more than others?
• How do Macro forces determine asset prices?
.
.
.
27
Boston College
Carroll School of Management
Some Things I still Wonder about
(after 20+ years as an empirical asset pricer)
• Why Do some stocks return more than others?
• How do Macro forces determine asset prices?
• Are stock returns Really Predictable over time?
.
.
28
Boston College
Carroll School of Management
Some Things I still Wonder about
(after 20+ years as an empirical asset pricer)
• Why Do some stocks return more than others?
• How do Macro forces determine asset prices?
• Are stock returns Really Predictable over time?
• How many of our “stylized facts” are really Data
Mining?
.
29
Boston College
Carroll School of Management
Some Things I still Wonder about
(after 20+ years as an empirical asset pricer)
• Why Do some stocks return more than others?
• How do Macro forces determine asset prices?
• Are stock returns Really Predictable over time?
• How many of our “stylized facts” are really Data
Mining?
• When will we move beyond the Fama French 3-factor
“Model” and FF25 Portfolios?
30
Boston College
Carroll School of Management
Top 10 Reasons I’m Glad to be an Empirical Asset Pricer:
1.
2.
3.
.
.
.
.
4. .
.
5. .
6. .
7. .
8. .
.
9. .
10. .
31
Boston College
Carroll School of Management
Top 10 Reasons I’m Glad to be an Empirical Asset Pricer:
1.
2.
3.
.
.
.
.
4. .
.
5. .
6. .
7. .
8. .
.
9. .
10. All my data are machine readable – no hand collection!
32
Boston College
Carroll School of Management
Top 10 Reasons I’m Glad to be an Empirical Asset Pricer:
1.
2.
3.
.
.
.
.
4. .
.
5. .
6. .
7. .
8. .
.
9. It kills the conversation so I can work on the airplane.
10. All my data are machine readable – no hand collection!
33
Boston College
Carroll School of Management
Top 10 Reasons I’m Glad to be an Empirical Asset Pricer:
1.
2.
3.
.
.
.
.
4. .
.
5. .
6. .
7. .
8. My parents think I’m not working when I’m not
teaching.
9. It kills the conversation so I can work on the airplane.
10. All my data are machine readable – no hand collection!
34
Boston College
Carroll School of Management
Top 10 Reasons I’m Glad to be an Empirical Asset Pricer:
1.
2.
3.
.
.
.
.
4. .
.
5. .
6. .
7. I meet practitioners who actually read my papers!
8. My parents think I’m not working when I’m not
teaching.
9. It kills the conversation so I can work on the airplane.
10. All my data are machine readable – no hand collection!
35
Boston College
Carroll School of Management
Top 10 Reasons I’m Glad to be an Empirical Asset Pricer:
1.
2.
3.
.
.
.
.
4. .
.
5. .
6. Neighbors share their investment wisdom at parties
7. I meet practitioners who actually read my papers!
8. My parents think I’m not working when I’m not
teaching.
9. It kills the conversation so I can work on the airplane.
10. All my data are machine readable – no hand collection!
36
Boston College
Carroll School of Management
Top 10 Reasons I’m Glad to be an Empirical Asset Pricer:
1.
2.
3.
.
.
.
.
4. .
.
5. My doctoral students are teaching me Mandarin
6. Neighbors share their investment wisdom at parties.
7. I meet practitioners who actually read my papers!
8. My parents think I’m not working when I’m not
teaching.
9. It kills the conversation so I can work on the airplane.
10. All my data are machine readable – no hand collection!
37
Boston College
Carroll School of Management
Top 10 Reasons I’m Glad to be an Empirical Asset Pricer:
1.
2.
3.
.
.
.
.
4. My Dean wonders why I get paid so much to study
models that don’t work.
5. My doctoral students are teaching me Mandarin
6. Neighbors share their investment wisdom at parties.
7. I meet practitioners who actually read my papers!
8. My parents think I’m not working when I’m not
teaching.
9. It kills the conversation so I can work on the airplane.
10. All my data are machine readable – no hand collection!
38
Boston College
Carroll School of Management
Top 10 Reasons I’m Glad to be an Empirical Asset Pricer:
1.
2.
3.
.
.
We make more money than Corporate Finance
scholars!
4. My Dean wonders why I get paid so much to study
models that don’t work.
5. My doctoral students are teaching me Mandarin
6. Neighbors share their investment wisdom at parties.
7. I meet practitioners who actually read my papers!
8. My parents think I’m not working when I’m not
teaching.
9. It kills the conversation so I can work on the airplane.
10. All my data are machine readable – no hand collection!
39
Boston College
Carroll School of Management
Top 10 Reasons I’m Glad to be an Empirical Asset Pricer:
1.
2.
3.
.
I get to work on SDFs, use the GMM, stuff like that!
We make more money than Corporate Finance
scholars!
4. My Dean wonders why I get paid so much to study
models that don’t work.
5. My doctoral students are teaching me Mandarin
6. Neighbors share their investment wisdom at parties.
7. I meet practitioners who actually read my papers!
8. My parents think I’m not working when I’m not
teaching.
9. It kills the conversation so I can work on the airplane.
10. All my data are machine readable – no hand collection!
40
Boston College
Carroll School of Management
Top 10 Reasons I’m Glad to be an Empirical Asset Pricer:
1.
2.
3.
“M Talk” is better than a secret handshake!
I get to work on SDFs, use the GMM, stuff like that!
We make more money than Corporate Finance
scholars!
4. My Dean wonders why I get paid so much to study
models that don’t work.
5. My doctoral students are teaching me Mandarin
6. Neighbors share their investment wisdom at parties.
7. I meet practitioners who actually read my papers!
8. My parents think I’m not working when I’m not
teaching.
9. It kills the conversation so I can work on the airplane.
10. All my data are machine readable – no hand collection!
41