Persistence risk is positive during recessions and negative during expansions. This logic led him to develop the implications of a productionbased asset pricing model in which covariances of asset returns with macroeconomic measures of investment are important risk factors. We propose a simple theory of asset pricing in which demand shocks, arising from stochastic changes in agents rate of time preference, play a central role in the determination of asset prices. While limited in scope, this approach offers precision in many applications. Two superb recent presentations of the asset pricing field campbell 2000. Cochrane and hansen 1992, campbell and cochrane 1999, and cochrane 2001 call this phenomenon the correlation puzzle. I thank shelly schneider from franklin associates for providing the data. Asset pricing is extremely readable, as cochrane stresses economic intuition over formal proofs. Introduction and overview asset market data are often ignored in evaluating macroeconomic mod. B9311016 asset pricing ii spring 2006 course outline and syllabus contact information. A low price implies a high rate of return, so one can also think of the theory as explaining why some assets pay higher average returns than others.
Empirical evidence menachem brennery and yehuda izhakianz november 6, 2015 abstract this paper introduces ambiguity in conjunction with risk to study the riskambiguityreturn relationship. Graduate school of business university of chicago 1101 e. Morerecently,lettauandludvigson 2011 document this puzzle using di erent methods. Agents care about the composition of a consumption basket that contains shelter and other goods.
Researchers have proposed rational expectations models that generate timevariation in the equity premium by introducing modi cations into the representative agents utility campbell and cochrane 1999. The asset pricing restrictions implied by the meanvariance e. Rui albuquerque, martin eichenbaum, victor luo, and sergio rebelo december 2015 abstract standard representativeagent models fail to account for the weak correlation between stock returns and measurable fundamentals, such as consumption and output growth. For debt, asset pricing is relatively simple, as cash flows to the owner are contractually fixed. This is the source of the graph and tables for the production section. Leroy and jan werner l, 2001, principles of financial economics, cambridge university press optional. Cochrane and lars peter hansen university of chicago, department of economics and nber asset pricing explorations for macroeconomics 1. These shocks amount to a parsimonious way of modeling the variation in discount rates stressed by campbell and ammer 1993 and cochrane 2011. Introduction and overview asset market data are often ignored in evaluating macroeconomic mod els, and aggregate quantity data are often avoided in empirical investiga tions of asset market returns. You can find my full professional bio here, and a detailed cv here. From which consumptionbased asset pricing models can.
Kerry back 2010, asset pricing and portfolio choice theory, oxford university press stephen f. More recently, lettau and ludvigson 2011 document this puzzle using different methods. However, while the equity risk premium is a familiar. Asset pricing problems are solved by judiciously choosing how much absolute and how much relative pricing one will do, depending on the assets in question and the purpose of the calculation. Asset pricing and the housing market bank of england. Samuelson award for scholarly writing on lifelong financial security, john cochrane s asset pricing now appears in a revised edition that unifies and brings the science of asset pricing up to date for advanced students and professionals. Cochrane asset pricing 2001 princeton university press.
Topics in asset pricing hebrew university of jerusalem. I will hand out a free hardcopy of the manuscript to all students registered in the course. Cochrane, asset pricing, princeton university press, revised ed. Cochrane graduate school of business university of chicago 1101 e. Return predictability and performance evaluation 4. Apr 11, 2009 cochrane traces the pricing of all assets back to a single ideaprice equals expected discounted payoffthat captures the macroeconomic risks underlying each securitys value. Cochrane traces the pricing of all assets back to a single ideaprice equals expected discounted payoffthat captures the. By using a single, stochastic discount factor rather than a separate set of tricks for each asset class, cochrane builds a unified account of modern asset pricing. To value an asset, we have to account for the delay and for the risk of its payments. Cochrane 1996 responded to the failure of the ccapm by noting that the production side of the economy also must satisfy dynamic euler equations. Jul 25, 2016 sign in to like videos, comment, and subscribe.
Its much simpler that way, and continuous time is a standard part of a finance phds toolkit. Bandiyand andrea tamoniz january 30, 2017 abstract we represent the beta of an asset as a linear combination of frequencyspeci c betas, i. Cochrane traces the pricing of all assets back to a single idea price equals expected discounted payoff that. Foresi and telmer 2001 and brandt, cochrane and santaclara 2006. Lochstoer page 1 fin512 empirical asset pricing autumn 2018 course outline and syllabus contact information. This bias is particularly large for moments characterizing the predictability of excess returns and the decomposition of the variance of the pricedividend ratio pro. Costis skiadas develops in depth the fundamentals of arbitrage pricing, meanvariance analysis, equilibrium pricing, and optimal consumptionportfolio choice in discrete settings, but with emphasis. A large subsequent literature in finance and macroeconomics has sought to. Asset pricing theory 12 1 consumptionbased model and overview 1. It develops empirical methodologies for measuring the degree of ambiguity and for assessing attitudes toward ambiguity. Asset pricing with fading memory columbia business school.
Campbell and cochrane 1999, heterogeneous agents constantinides and duffie 1996, longrun risk bansal. Investor psychology and asset pricing david hirshleifer abstract the basic paradigm of asset pricing is in vibrant flux. In this approach, security expected returns are determined by both risk and misvaluation. Valuation risk and asset pricing 2863 it turns out that, for a large set of parameter values, our model implies that the smm estimators suffer from substantial smallsample bias.
As will be discussed in more detail later, a similar payoff proxy can be constructed for housing. B9311016 asset pricing ii course outline and syllabus. Ive been at the university of chicago my entire professional life, since getting my phd from the university of california at berkeley in 1986. By appointment course description this course gives an introduction to asset pricing in intertemporal equilibrium models and to modern dynamic asset allocation. The elements of the course that focus on derivative pricing are based on. Asset pricing, professor doron avramov, finance department, hebrew university of jerusalem, israel course materials the econometrics of financial markets, by john y. Asset pricing and the housing market 33 if payoffs grow at a constant real rate g, equation 1 can be rearranged into 2. Pdf asset pricing solutions manualwinner of the prestigious paul a. Asset pricing theory is an advanced textbook for doctoral students and researchers that offers a modern introduction to the theoretical and methodological foundations of competitive asset pricing.
Asset pricing theory tries to understand the prices or values of claims to uncertain payments. I also thank george constantinides, douglas diamond, robert dittmar, john heaton. This otherwise comprehensive book doesnt have any option pricing in it, though blackscholes is a cornerstone of finance. Investor psychology and asset pricing david hirshleifer abstract. In revising asset pricing and the online versions, i have moved entirely to continuous time rather than lognormal approximations. Evaluating the specification errors of asset pricing models. The presence of composition risk increases the mean and. The three consumptionbased asset pricing models that act as sources for the modelbased priors are the habit formation hf model see campbell and cochrane 1999, the prospect theory pt model see barberis, huang, and santos 2001, and the long run risk lrr model see bansal and yaron. Monika piazzesi, martin schneider, and selale tuzel may 2003 abstract this paper builds an equilibrium asset pricing model with housing consumption. Cochrane asset pricing chapter 20, time series predictabilit. Copyright 1998, 1999, 2000, 2001, 2002, 2003, 2004, 2005. John cochrane and pietro veronesi, as well as to editor campbell harvey, and an anonymous referee and associate editor. Samuelson award for scholarly writing on lifelong financial security, john cochranes asset pricing now appears in a revised edition that unifies and brings the science of asset pricing up to date for advanced students and professionals.
The purely rational approach is being subsumed by a broader approach based upon the psychology of investors. Asset pricing with persistence risk daniel andrei michael haslery alexandre jeanneretz may 30, 2018 abstract persistence risk is an endogenous source of risk that arises when a rational agent learns about the length of business cycles. Persistence risk is positive during recessions and. Asset pricing wikibooks, open books for an open world. Asset pricing with persistence risk stanford university. Cochrane asset pricing chapter 20, time series predictability. Comments and suggestions are most welcome this book draft is c john h. Eiefluiss, graduate program asset pricing nicola borri 20172018 1 presentation 1. Then we give a more detailed description of the campbellcochrane habit based model. I do research in asset pricing and monetary economics. Cochrane traces the pricing of all assets back to a single ideaprice equals expected discounted payoffthat captures the macroeconomic risks underlying each securitys value.