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Department of Finance, The University of Iowa |
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Scott Cederburg |
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Research |
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Current Working Papers
Intertemporal Risk and the Cross Section of Expected Stock Returns, 2010 I test the cross-sectional implications of the Intertemporal Capital Asset Pricing Model (ICAPM) of Merton (1973) and Campbell (1993, 1996) using a new firm-level approach. I find that the ICAPM performs well in explaining returns. Consistent with theoretical predictions, investors require a large positive premium for taking on market risk and zero-beta assets earn the risk-free rate. Moreover, investors accept lower returns on assets that hedge against adverse shifts in the investment opportunity set. The ICAPM explains more cross-sectional variation in average returns than either the CAPM or Fama—French (1993) model. I also investigate the conjecture that the SMB and HML factors of the Fama—French model proxy for intertemporal risk. The empirical evidence suggests the Fama—French model is not an ICAPM model.
Cross-Sectional Asset Pricing Puzzles: An Equilibrium Perspective, 2010 With Doron Avramov and Satadru Hore This paper proposes an intertemporal asset pricing model that simultaneously resolves the puzzling negative relations between expected stock return and analysts' forecast dispersion, idiosyncratic volatility, and credit risk. All three effects emerge in a long-run risk economy accommodating a formal cross section of firms characterized by mean-reverting expected dividend growth. Higher cash-flow duration firms exhibit higher exposure to economic growth shocks while they are less sensitive to firm-specific news. Such firms command higher risk premiums but exhibit lower dispersion, idiosyncratic volatility, and credit risk. Empirical evidence broadly supports our model’s predictions. All three effects are tightly related in the data and higher dispersion, idiosyncratic volatility, and credit risk firms display lower exposure to long-run risk along with higher firm-specific risk.
Do Multifactor Models Explain Asset-Pricing Anomalies?, 2010 With Phil Davies and Michael O’Doherty The finance literature has identified multiple firm characteristics associated with CAPM alphas, suggesting the CAPM fails to explain much of the cross-sectional variation in average returns. In response, multifactor models that aim to resolve a wide range of these asset-pricing anomalies have been proposed. These models typically augment the CAPM market factor with factors formed on known anomaly variables. In this paper, we examine the ability of three prominent multifactor models to explain 11 CAPM anomalies. We introduce a new firm-level methodology to model conditional alphas as a function of firm characteristics and find that multifactor models explain only the anomalies mechanically linked to their additional factors. Given the poor performance of multifactor models, we further apply our methodology to better characterize the CAPM’s failings. Our results suggest the anomaly-based evidence against the CAPM is overstated. We find that anomalies are primarily confined to small stocks, few characteristics are robustly associated with CAPM alphas out of sample, and most firm characteristics do not contain unique information about abnormal returns. Working paper available upon request.
Works in Progress
Anomaly Trading Intensity and Mutual Fund Performance With Phil Davies, Michael O’Doherty, and Jerome Taillard
Betas and Future Returns With Phil Davies and Michael O’Doherty
Cross-Sectional Asset Pricing in Production Economies
Long-Run Risk: Implications for Asset Allocation With Doron Avramov and Jun Tu
Previous Working Papers
Mutual Fund Investor Behavior across the Business Cycle, 2007 Mutual fund investor behavior changes across the business cycle. In economic expansions, investors strongly display the documented behaviors of chasing returns and searching for managerial skill. Expansion investors earn higher returns and alphas by pursuing this strategy, but this result is partially explained by the momentum effect. In contrast, recession investors do not chase returns and exhibit a weaker tendency to seek alpha. Even before controlling for momentum, no smart money effect exists in recessions. Instead of chasing performance, recession investors make investment decisions to change their exposure to aggregate risk factors. Investors tend to avoid funds with exposure to the market and book-to-market factors during recessions, while they show the opposite pattern in expansions. |
