M. Szymanowska (Marta)
http://repub.eur.nl/ppl/13872/
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RePub, Erasmus University RepositoryAsset Pricing Restrictions on Predictability: Frictions Matter
http://repub.eur.nl/pub/37442/
Fri, 27 Apr 2012 00:00:01 GMT<div>F.A. de Roon</div><div>M. Szymanowska</div>
U.S. stock portfolios sorted on size; momentum; transaction costs; market-to-book, investment-to-assets, and return-on-assets (ROA) ratios; and industry classification show considerable levels and variation of return predictability, inconsistent with asset pricing models. This means that a predictable risk premium is not equal to compensation for systematic risk as implied by asset pricing theory. We show that introducing market frictions relaxes these asset pricing moments from a strict equality to a range. Empirically, it is not short sales constraints but transaction costs (below 35 basis points) that help to reconcile the observed predictability with linear portfolio return-based factor models, and partly with the durable consumption model. Across the sorts, predictability in industry returns can be reconciled with all models considered with only a 25 basis point transaction cost, whereas for momentum and ROA portfolios, up to 115 basis points are needed.
Asset Pricing Restrictions on Predictability: Frictions Matter
http://repub.eur.nl/pub/31781/
Fri, 11 Nov 2011 00:00:01 GMT<div>F.A. de Roon</div><div>M. Szymanowska</div>
U.S. stock portfolios sorted on size, momentum, transaction costs, M/B, I/A and ROA
ratios, and industry classiÂ…cation show considerable levels and variation of return predictability,
inconsistent with asset pricing models. This means that a predictable risk premium is not equal
to compensation for systematic risk as implied by asset pricing theory (Kirby 1998). We show
that introducing market frictions relaxes these asset pricing moments from a strict equality to
a range. Empirically, it is not short sales constraints but transaction costs (below 35 basis
points) that help to reconcile the observed predictability with the Fama-French-Carhart four-
factor model and the Chen-Novy-Marx-Zhang three factor model, and partly with the Durable
Consumption model. Across the sorts, predictability in industry returns can be reconciled with
all models considered with only 25 basis points transaction costs, whereas for momentum and
ROA portfolios up to 115 basis points are needed.