Bad Beta, Good Beta

Campbell, John Y.; Vuolteenaho, Tuomo

doi:10.1257/0002828043052240

Cited by 1,071 publications

(555 citation statements)

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“…These contemporaneous terms imply that both cash flow news, dB t , and discount rate news, dB x t , impact prices. This gives a "badbeta/good-beta" interpretation as in Campbell and Vuolteenaho (2004). Our argument implies that properly specified asset pricing models should have shocks that have a "bad-beta/goodbeta" interpretation.…”

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confidence: 68%

Dynamic Present Values and the Intertemporal CAPM

Wang

2011

SSRN Journal

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Merton's (1973) intertemporal Capital Asset Pricing Model is difficult to reconcile with present value computation when investment opportunities are random and time-varying.Merton assumes a geometric price process, and his equilibrium is constructed by solving for the instantaneous expected rate of return. We argue that this method is generally inconsistent with present value computations. We derive an alternative version of the Intertemporal CAPM based explicitly on present value computation with a strictly exogenous cash flow.Our model is derived without restrictive assumptions about the structure of the equilibrium price process. An essential feature of our model is that prices respond endogenously to shocks in expected return. In an example model, we show that shocks to stochastic volatility is negatively correlated with stock returns in equilibrium. The correlation increases in absolute magnitude with risk aversion.

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confidence: 68%

Dynamic Present Values and the Intertemporal CAPM

Wang

2011

SSRN Journal

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Section: Methodsmentioning

confidence: 99%

“…While we are fully aware of the limitations of the CAPM model for predicting investor behavior (e.g. Fama and French, 1995;Fama and French, 2006;Campbell and Vuolteenaho, 2004), our goal here is not to predict or even to recommend investment-type decisions but merely to explore the parallel between financial assets and alums as potential investments using the traditional CAPM risk-return relationship.To create mutually exclusive and exhaustive asset classes, we divided continuous variables into categories: SAT In preliminary data exploration, we discovered that eight individuals in our dataset were major donors, and their presence determined all subsequent tests and results. We elected to omit them from consideration as they spanned many asset categories but clearly masked the underlying pattern in the remaining 16, 992 observations.…”

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confidence: 99%

Don’t Put All of Your Alums in One Basket: College Admissions Decisions as a Portfolio Choice Problem

Dahl¹,

Johnson²

2016

International Journal of Financial Research

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We consider philanthropy by college alums from an innovative and provocative perspective: what if prospective college students were considered members of asset classes with different risk-return combinations? Using forty years of merged admissions-philanthropy records on students at a highly selective liberal arts college, we estimate the simple financial model that this allegory implies. We find benefits to diversification, identify the slope of the market risk-return line, and point out the most (and least) attractive potential students in terms of their projected future donations.Keywords: admissions, alum, portfolio, CAPM IntroductionAlumni giving has become increasingly important for institutions of higher education, accounting for roughly fifteen percent of all private funding for higher education, or roughly $4 billion (Council for Aid to Education, 2012). Even as alumni giving has been rising (Kaplan, 2007), the participation rate of alumni giving back to their alma mater has been falling, while those who donate choose to contribute larger amounts (Engagement Strategies Group, 2010). Given this dynamic, there is enormous value in finding the right potential donors; it is unsurprising that academic models and consulting companies have tackled the question with fervor. This paper models alumni giving from a unique perspective, treating college admissions decisions as a portfolio choice problem, where prospective students are members of asset classes with rates of risk and return measured a priori by the propensity of each asset class to subsequently donate to their institution. While we do not suggest that admissions decisions are (or should be) made in this manner, we reflect on the implications of a simple Capital Asset Pricing Model (CAPM) framework using data provided by a selective liberal arts college.Academic research clearly describes patterns in alumni giving (e.g. Bruggink and Siddiqui,1995;Okunade et al., 1994;Wunnava and Lauze, 2001), identifying descriptive variables that predict philanthropy (Lara and Johnson, 2014;Meer, 2011;Meer and Rosen, 2007; Clotfelter, 2003; Monks, 2003;Cunningham and Cochi-Ficano, 2002; Forbes and Zampelli, 1997;Lindahl and Winship, 1992). Obvious demographic variables such as age, gender, ethnicity, and marital status have been shown to have predictive power, as have activities while in school (major, involvement in college sports, GPA, affiliation with a fraternity or sorority, certain kinds of financial aid) and post-graduation factors (time since graduation, number of relatives at one's alma mater, reunion years, willingness to share contact information with the college, response to college surveys, highest degree attained, participation in student government, induction into honorary societies, participation in alumni activities).In contrast, no study has proposed a predictive model based purely on factors known before the student enters higher education. Unlike the literature, our intention is not to explain or predict alumni giving, but to create asset ...

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“…First, we examine the predictive ability of another popular …nancial ratio, namely, the price-earnings ratio. This is motivated by the fact that some studies using US data (for example, Campbell & Vuolteenaho, 2004) …nd that smoothed market price-earnings ratios have better forecasting ability than dividend yields. We carefully construct Japanese price-earnings ratios following the methodology pioneered by Robert Shiller (1989Shiller ( , 2005 and examine their ability to forecast aggregate stock returns.…”

Section: Introductionmentioning

confidence: 99%

Forecasting Japanese Stock Returns with Financial Ratios and Other Variables

Aono

Iwaisako

2010

Asia-Pac Financ Markets

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This paper extends the previous analyses of the forecastability of Japanese stock market returns in two directions. First, we carefully construct smoothed market price-earnings ratios and examine their predictive ability. We …nd that the empirical performance of the price-earnings ratio in forecasting stock returns in Japan is generally weaker than both the price-earnings ratio in comparable US studies and the price dividend ratio. Second, we also examine the performance of several other forecasting variables, including lagged stock returns and interest rates. We …nd that both variables are useful in predicting aggregate stock returns when using Japanese data. However, while we …nd that the interest rate variable is useful in early subsamples in this regard, it loses its predictive ability in more recent subsamples. This is because of the extremely limited variability in interest rates associated with operation of the Bank of Japan's zero interest policy since the late 1990s. In contrast, the importance of lagged returns increases in subsamples starting from the 2000s. Overall, a combination of logged price dividend ratios, lagged stock returns, and interest rates yield the most stable performance when forecasting Japanese stock market returns.

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Bad Beta, Good Beta

Cited by 1,071 publications

References 86 publications

Dynamic Present Values and the Intertemporal CAPM

Dynamic Present Values and the Intertemporal CAPM

Don’t Put All of Your Alums in One Basket: College Admissions Decisions as a Portfolio Choice Problem

Forecasting Japanese Stock Returns with Financial Ratios and Other Variables

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