An extensive body of research supports the momentum strategy's persistence but disagrees on the underlying source of its profitability. A key obstacle to distinguishing between behavioral and rational explanations of momentum is that mispricing is unobservable. This dissertation studies the endogenous relationship between momentum trading and mispricing. The basic idea is that momentum trades can impede arbitrage when they are in the opposite direction of arbitrage trades and reinforce arbitrage when they are in the same direction. A simple model suggests that when momentum trades reinforce the arbitrage process, momentum strategy returns contain relatively less mispricing than when momentum trades impede the arbitrage process. Empirical results show that an arbitrage-reinforcing strategy has significantly higher average returns that are largely related to risk and do not reverse in subsequent periods, while an arbitrage-impeding strategy exhibits significant long-term reversal consistent with more mispricing. Additional tests show that winners have higher future growth rates than losers consistent with cross-sectional differences in expected returns. Overall, the evidence suggests that momentum profitability is largely related to risk which is partially masked by mispricing. An important implication of this model is that, like noise traders, trading strategies that do not condition on relative value can impede arbitrage.

This dissertation provides evidence on the risk factors that are priced in bank equities. Alternative empirical models with precedent in the nonfinancial asset pricing literature are tested, including the single-factor Capital Asset Pricing Model (CAPM), three-factor Fama-French model, and Intertemporal Capital Asset Pricing Model (ICAPM). The empirical results indicate that an unconditional two-factor Intertemporal Capital Asset Pricing Model (ICAPM) model, that includes the stock market excess return and shocks to the slope of the yield curve, is useful in explaining the cross-section of bank stock returns. I find no evidence, however, that firm specific factors, such as size and book-to-market ratios, are priced in bank stock returns. These results have a number of practical implications for event studies of banking firms, estimation of bank cost of capital and investment performance, as well as regulatory initiatives to utilize market discipline to evaluate bank risk under Basel II.

Zugl.: Wuppertal, Universiẗat, Diss., 2004.

In this paper we prove a topological lemma on real valued random variables which implies the basic ingredients for the proof of the Fundamental Theorem of Asset Pricing in the two period case. In particular, previous results of Stricker and of Schachermayer are special cases of our result. Our proof is considerably shorter and more transparent than previous proofs of related special cases. / Series: Working Papers SFB "Adaptive Information Systems and Modelling in Economics and Management Science"

Questa tesi comprende due saggi. Il saggio 1 si concentra sull'effetto del rischio macroeconomico su Value Premium. In questo documento, esaminiamo in che misura il Value Premium è influenzato dalla percezione del rischio macroeconomico da parte dell'investitore. Indaghiamo l'impatto dell'effetto macro sui multipli fondamentali che risulta dalla decomposizione market-to-book di Rhodes-Kropf Robinson e Viswanathan (2005). Poiché questi multipli contengono le aspettative degli investitori sia sui tassi di crescita sia sui tassi di sconto, le loro stime variabili nel tempo dovrebbero acquisire informazioni sul sentimento dell'investitore in merito alle prospettive economiche. Scopriamo che il rendimento del Tesoro a 10 anni e la pendenza della Struttura a termine hanno un impatto significativo su diversi multipli fondamentali con un conseguente effetto sulla stima del valore intrinseco dell'impresa. La nostra configurazione empirica ci consente di stimare i componenti di mercato per libro utilizzando valori fondamentali solidi che sono ortogonali agli effetti dell'incertezza macroeconomica. Il nostro risultato chiave è che quando eliminiamo l'effetto delle aspettative degli investitori sullo scenario economico, il premio di valore premia, quasi interamente, il rischio dimensionale. Adeguandosi all'esposizione dimensionale, i multipli di contabilità ortogonale rimuovono l'effetto macro riducendo il rendimento in eccesso di una valutazione errata. Saggio 2 si concentra sull'effetto dei vincoli di leva sul Value Premium. Introduciamo una giustificazione teorica basata sull'avversione dell'investitore nei confronti della leva finanziaria (Frazzini e Pedersen, 2014) e fornendo prove empiriche sulla connessione dell'anomalia a bassa beta e sui rendimenti superiori ottenuti dalle azioni di valore. Studiamo le variazioni nelle serie temporali beta di portafogli ordinate in base al componente stimato dalla decomposizione market-to-book di Rhodes-Kropf Robinson e Viswanathan (2005). Scopriamo che in media i portafogli sottovalutati hanno una beta variabile nel tempo più piccola rispetto a sopravvalutata. Indaghiamo anche la sensibilità della componente di svalutazione delle azioni a bassa beta rispetto ai macro proxy delle condizioni di finanziamento. Coerentemente con la teoria dell'avversione alla leva finanziaria, i risultati empirici mostrano un'interazione negativa tra questa componente e le condizioni di finanziamento che confermano l'effetto negativo sui prezzi per le azioni low-beta quando aumentano le restrizioni sulla leva finanziaria. , costruiamo strategie long-short basate sulla componente di valutazione errata del market-to-book. Il nostro risultato empirico chiave è che l'eccesso di rendimento della componente market-to-book, più attribuibile al prezzo errato dell'impresa, è influenzato negativamente dal peggioramento delle condizioni di finanziamento. Questa evidenza supporta la teoria dell'avversione della leva finanziaria nella spiegazione del rendimento superiore di portafogli sottovalutati. / This thesis includes two essays. Essay 1 concentrates on the effect of macroeconomic risk on Value Premium. In this paper, we examine to what extent the Value Premium is affected by the investor's perception of macroeconomic risk. We investigate the impact of the macro effect on the fundamental multiples which results from the market-to-book decomposition of Rhodes-Kropf Robinson, and Viswanathan (2005). Since these multiples contain investor's expectations both on growth rates and discount rates their time-varying estimates should capture information on the investor's sentiment about economic perspectives. We find that 10 Year Treasury yield and the slope of Term Structure have a significant impact on several fundamental multiples with a consequential effect on the estimate of firm intrinsic value. Our empirical setup allow us to estimate market-to-book components by using firm fundamental values which are orthogonal to the effects of macroeconomics uncertainty. Our key result is that when we remove the effect of investor's expectations on the economic scenario the value premium rewards, almost entirely, the size risk. Adjusting for the size exposure, orthogonal accounting multiples remove the macro effect reducing the excess return of firm misvaluation. Essay 2 focuses on the effect of leverage constraints on the Value Premium. We introduce a theoretical justification based on investor's aversion to leverage (Frazzini and Pedersen, 2014) and by providing empirical evidence about the connection of low-beta anomaly and the superior returns earned by value stocks. We study variations in beta time-series of portfolios sorted on the component estimated by the market-to-book decomposition of Rhodes-Kropf Robinson, and Viswanathan (2005). We find that on average undervalued portfolios have a smaller time-varying beta than overvalued. We also investigate the sensitivity of the misvaluation component of low-beta stocks to macro proxies of funding conditions. Consistently with Leverage Aversion Theory, empirical results show a negative interaction between this component and funding conditions confirming the negative effect on prices for low-beta stocks when leverage constraints increase.To test the effect of leverage constraints on the excess return originated by the firm's mispricing, we construct long-short strategies based on the misvaluation component of market-to-book.Our key empirical result is that the excess return of the market-to-book component, most attributable to the firm's mispricing, is negatively affected by the worsening of funding conditions. This evidence supports the Leverage Aversion Theory in explaining the superior return of undervalued portfolios.

Thesis advisor: David H. Solomon / My dissertation comprises three essays delving into questions that contemporary investors encounter in the ever-evolving landscape of investments. The first essay examines how the presence of public pension funds as limited partners influences venture capitalists' (VCs) risk-taking behaviors. It notes that investments by public pension funds in the venture capital market have increased over the past two decades, and these funds possess unique objective functions compared to other venture capital investors. Findings suggest that VCs backed by public pensions tend to invest in startups with lower-risk profiles, such as those with technologies related to public companies, numerous patents, and later funding rounds, leading to more frequent and quicker exits but lower returns. To establish causality, I employ an instrumental variable evaluating the likelihood of public pension funding based on the location of funds initiated during a typical fundraising cycle in a venture capital firm. Furthermore, I find that public pensions prefer venture capital firms with a track record of conservatively managing funds, particularly those pensions that have previously engaged with such firms. The second essay shifts focus to the stock market, documenting higher returns from companies developing new technologies. The advancement of new technologies is pivotal to an economy’s potential, yet it carries inherent risks. As per investment theories, investors demand premiums for holding stocks associated with high uncertainty, prompting questions about whether they are adequately compensated for investing in companies undertaking highly uncertain projects. A novel application of a graph-neural network model identifies new technology patent publications annually, enabling the calculation of firms' exposure to new technologies. With the measure, I find that portfolios with high new-tech exposure outperform those with low exposure, driven by significant risk premiums. This sheds light on the positive correlation between idiosyncratic risk and stock returns, contributing to our understanding of the market's valuation of technological innovation. The third essay presents a systematic analysis of stock market valuations of Corporate Social Responsibility (CSR) initiatives. The study identifies public demand for CSR as a pivotal factor in enhancing the value of CSR activities. Analyzing market reactions to CSR activities via cumulative abnormal returns, the research finds overall neutral market responses. Nonetheless, it finds that heightened public concern for specific issues can sway market reactions positively. Also, when CSR initiatives employ strategies that extend beyond the capabilities of individuals, the market responses tend to be favorable. The paper further shows that firms strategically increase their CSR activities and choose implementation modes, aiming to enhance their value. To explain why market reactions are, on average, neutral, I further provide evidence suggesting reasons such as virtue signaling, a lack of understanding of the importance of profitability, and other executive motives. Together, these essays deepen our understanding of investments by exploring how financial market participants, corporate endeavors in technological advancements, and societal expectations for corporate social responsibility influence investor behavior and asset prices. / Thesis (PhD) — Boston College, 2024. / Submitted to: Boston College. Carroll School of Management. / Discipline: Finance.

General content: Current methods of estimation of cost of capital in the emerging markets are often neglecting various contradictions with the essentials of the model structure and assumptions. As the result of such imprecisions, the cost of equity is often understated (overstated). This thesis will attempt to assess current level of emerging market integration, liquidity and concentration. This will be followed by evaluation of traditional and alternative models for estimation of cost of equity. The author will address several currently available models such as Credit Rating Model, D-CAPM model, various versions of traditional CAPM models. Furthermore, she will compare and contrast their limitations taking into account the context of emerging markets. The testing of the models will be performed on country basis through the means of index data. In the last chapter, discussion of the results and possible improvements of the valuation approaches will take place.

No / Several recent empirical tests of the Capital Asset Pricing Model have been based on the conditional relationship between betas and market returns. This paper shows that this method needs reconsideration. An adjusted version of this test is presented. It is then demonstrated that the adjusted technique has similar, or lower, power to the more easily implemented CAPM test of Fama and MacBeth (1973) if returns are normally distributed.

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