Empirical Cross-Sectional Asset Pricing

60 Pages Posted: 13 Nov 2012

See all articles by Stefan Nagel

Stefan Nagel

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research; CESifo (Center for Economic Studies and Ifo Institute)

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Date Written: November 13, 2012

Abstract

I review recent research efforts in the area of empirical cross-sectional asset pricing. I start by summarizing the evidence on cross-sectional return predictability and the failure of standard (consumption) CAPM models and their conditional versions to explain these predictability patterns. One response in part of the recent literature is to focus on ad-hoc factor models, which summarize the cross-section of expected returns in parsimonious form, or on production-based approaches, which suggest links between firm characteristics and expected returns. Without imposing restrictions on investor preferences and beliefs, neither one of these two approaches can answer the question why investors price assets the way they do. Within the rational expectations paradigm, recent research that imposes such restrictions has focused on the ICAPM, long-run risks models, as well as frictions and liquidity risk. Approaches based on investor sentiment have focused on the development of empirical proxies for sentiment and for the limits to arbitrage that allow sentiment to affect prices. Empirical work that considers learning and adaptation of investors has worked with out-of-sample tests of cross-sectional predictability.

Keywords: empirical asset pricing, cross-section of stock returns

JEL Classification: G12, G14

Suggested Citation

Nagel, Stefan, Empirical Cross-Sectional Asset Pricing (November 13, 2012). Available at SSRN: https://ssrn.com/abstract=2175304 or http://dx.doi.org/10.2139/ssrn.2175304

Stefan Nagel (Contact Author)

University of Chicago - Booth School of Business ( email )

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United States

National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research ( email )

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute) ( email )

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Munich, DE-81679
Germany

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