Forward exchange rate unbiasedness is rejected in tests from the current floating exchange rate era. This paper surveys advances in this area since the publication of Hodrick's (1987) survey. It documents that the change in the future exchange rate is generally negatively related to the forward discount. Properties of the expected forward forecast error are reviewed. Issues such as the relation...

We propose a model in which real interest rates respond to both expected consumption growth and time preferences. Exposures to future consumption growth and time preference interest rate shocks are both priced relative to the Capital Asset Pricing Model (CAPM) and the Consumption Capital Asset Pricing Model (CCAPM). However, the two types of interest rate risk have different prices, and when el...

We propose a consumption-based capital asset pricing model in which the representative agent’s preferences display state-dependent risk aversion. We obtain a valuation equation in which the vector of excess returns on equity includes both consumption risk as well as the risk associated with variations in preferences. We develop a simple model that can be estimated without specifying the functio...

I investigate empirically the ability of financial market incompleteness to help explaining the equity premium puzzle. I estimate the non-diversifiable component of the cross-sectional volatility of income and examine its cyclical properties. Equipped with these estimates, I compute the implied equilibrium Sharpe-ratio of excess returns and evaluate the ability of idiosyncratic risk to improve ...

In this paper we test for the inclusion of the bid-ask spread in the consumption CAPM, in the UK stock market over the time period of 1980-2000. Two econometric models are used; first, Fisher’s (1994) asset pricing model is estimated by GMM, and secondly, the VAR approach proposed by Campbell and Shiller is extended to include the bid-ask spread. Overall the statistical tests are unable to reje...

I review recent research efforts in the area of empirical cross-sectional asset pricing. I start by summarizing the evidence on cross-sectional return predictability and the failure of standard (consumption) CAPM models and their conditional versions to explain these predictability patterns. One response in part of the recent literature is to focus on adhoc factor models, which summarize the cr...

The mathematical programming technique Data Envelopment Analysis is used to test the hypothesis of Averch and Johnson that utility regulation leads to overuse of capital. The regulated firm earns a return s greater than its cost of capital r, an implicit capital subsidy resulting in allocative inefficiency. Technical and Allocative inefficiency are based on Cost and Production Frontiers from 33...

This paper shows how differences across countries of 1) inflation rates, 2) consumption baskets of investors, and 3) investment opportunity sets of investors matter when one applies capital asset pricing models in an international setting. In particular, the fact that countries differ is shown to affect the portfolio held by investors, the equilibrium expected returns of risky assets, and the f...

This paper is interested in exploring the capabilities and limitations of investment decision making under uncertainty through lens Quantum Probabilities/formalism stand will be focusing on Capital Asset Pricing Model as use case. Our main purpose to examine historical structural foundations surrounding paradoxes. To ease comprehension issue common reader, we first outline key cornerstones two ...