Asset Pricing at the Millennium

Abstract

This paper surveys the field of asset pricing. The emphasis is on the interplay between theory and empirical work and on the trade-off between risk and return. Modern research seeks to understand the behavior of the stochastic discount factor SDF! that prices all assets in the economy. The behavior of the term structure of real interest rates restricts the conditional mean of the SDF, whereas patterns of risk premia restrict its conditional volatility and factor structure. Stylized facts about interest rates, aggregate stock prices, and cross-sectional patterns in stock returns have stimulated new research on optimal portfolio choice, intertemporal equilibrium models, and behavioral finance. gave helpful comments on the first draft. I acknowledge the financial support of the National Science Foundation. 1518The Journal of Finance with rational agents who are heterogeneous in their information, income, preferences, or constraints. Section VI discusses recent research on behavioral finance, in which some agents are assumed to have nonstandard preferences or irrational expectations, whereas other agents have standard preferences and rational expectations. Section VII concludes. A. Mean and Variance of the SDF A.1. The Real Interest RateAsset return data restrict the moments of the SDF. The one-period real interest rate is closely related to the conditional mean of the SDF, conditioning on information available at the start of the period. If there is a shortterm riskless real asset f with a payoff of one tomorrow, then equation~1! implies that E t M tϩ1 ϭ P ft ϭ 1

A Closer Look at the Behavior of Uncertainty and Disagreement: Micro Evidence from the Euro Area

“…1 For example, it is argued that uncertainty is an important source of business cycle fluctuations [Bloom (2009), Bloom et al (2018)] and a fundamental determinant of asset prices [Campbell (2000)]. Differences in agents' expectations have been cited as an important channel for monetary policy to affect real activity [Woodford (2003), Mankiw and Reis (2002), Lorenzoni (2009)] and a key factor influencing the effect of public information signals [Morris and Shin (2002), Amador and Weill (2010)].…”

Common stock returns in the pre-WWI Berlin Stock Exchange

“…Still, an additional characteristic, momentum, has explanatory power beyond the three-factor model (Fama and French 1996). Notably, Campbell (2000) finds that the size effect vanished in the period after it was first widely published. Likewise, Dimson and Marsh (1999) find that after the small-cap premium was revealed, it disappeared and even turned into a discount-though it later reappeared (Dimson et al 2004).…”

“…10 Surveys of this literature can be found in Chan and Lakonishok (2004), Fama and French (2004), Oyefeso (2004), and Perold (2004). Campbell et al (1997) and Campbell (2000) also provide thorough reviews of the empirical literature. See also Schwert (2003).…”

On the Systematic Downside Risk Measure: A Note

“…The return/risk framework used by variance and beta had led to lots of debates. See the work of Campbell (2000).…”