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Title: | Three Essays on Conditional Factor Premiums and Asset Pricing |
Other Titles: | A Thesis Submitted to the School of Graduate Studies in the Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy |
Authors: | Guo, Laite |
Advisor: | Balvers, Ronald |
Department: | Business |
Publication Date: | 2022 |
Abstract: | While existing studies have provided rich insights for understanding asset pricing factors or anomalies, this thesis refreshes the understanding of several major asset pricing phenomena from novel perspectives. Specifically, the refreshed understanding is achieved by conditioning on time-series or cross-sectional information. The first chapter resurrects the size effect, the first challenge to market efficiency under the CAPM. Motivated by the extensive evidence of information barriers facing small stocks and the consequential underreaction of small-stock prices to information shocks, I conjecture that a big-minus-small effect comparable in strength to the small-minus-big effect exists. Conditional on ex-ante signals capturing information shocks, I uncover the two faces of the size effect. The finding not only translates into a size investment strategy with a remarkable improvement in risk-return trade-off but also sheds new light on the long-standing argument about the size effect’s validity. The second chapter refreshes the understanding of the low-beta anomaly. While recent studies have resolved the previously known low-beta anomaly from different perspectives, this chapter discovers a new low-beta anomaly not explained by these studies. I show that, theoretically, the new and known low-beta anomalies differ in their underlying factors. The known low-beta anomaly is driven by factors directly correlated with the market risk, while the new low-beta anomaly is driven by factors only partially correlated with the market risk. Besides showing that the low-beta anomaly is still unexplained by existing studies, the significance of the new low-beta anomaly lies in that it identifies partial-correlated factors, which are unnoticeable but are important for driving asset returns. The last chapter extends the analysis of the low market-beta anomaly to all factors or anomalies. Unlike the negative market beta-alpha relationship, which directly violates equilibrium theories such as the Consumption-CAPM, the implication of a factor-beta anomaly is unclear. After all, there is no consensus on the origins of most factors or anomalies, making it more attractive to clarify this class of phenomena as a whole to pave the way for economic interpretations. I explicitly model the mechanism for a factor-beta anomaly to emerge under a factormodel framework, which rationalizes the pervasiveness of low factor-beta anomalies and provides a paradigm for inferring information from an observed factor-beta anomaly. Through the stochastic discount factor, asset pricing factors are at the core of the interaction between the financial market and the real economy. This thesis takes a crucial step toward understanding this interaction by enhancing the understanding of these asset pricing factors and anomalies. |
URI: | http://hdl.handle.net/11375/28603 |
Appears in Collections: | Open Access Dissertations and Theses |
Files in This Item:
File | Description | Size | Format | |
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guo_laite_finalsubmission202301_doctorofphilosophy.pdf | 4.16 MB | Adobe PDF | View/Open |
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