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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