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    Two Pillars of Asset Pricing

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    The document summarizes Eugene Fama's work on two pillars of asset pricing: efficient capital markets and asset pricing models. It discusses his early event studies and predictive regressions that provided evidence supporting market efficiency. It then describes his influential work developing the capital asset pricing model and the three-factor model, which related stock returns to market, size, and value factors.

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    Two Pillars of Asset Pricing

    Uploaded by

    JR
    3 views8 pages
    The document summarizes Eugene Fama's work on two pillars of asset pricing: efficient capital markets and asset pricing models. It discusses his early event studies and predictive regressions that provided evidence supporting market efficiency. It then describes his influential work developing the capital asset pricing model and the three-factor model, which related stock returns to market, size, and value factors.

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    Eugene Fama

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    Fama Lecture Slides

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    The document summarizes Eugene Fama's work on two pillars of asset pricing: efficient capital markets and asset pricing models. It discusses his early event studies and predictive regressions that provided evidence supporting market efficiency. It then describes his influential work developing the capital asset pricing model and the three-factor model, which related stock returns to market, size, and value factors.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    3 views8 pages

    Two Pillars of Asset Pricing

    Uploaded by

    JR
    The document summarizes Eugene Fama's work on two pillars of asset pricing: efficient capital markets and asset pricing models. It discusses his early event studies and predictive regressions that provided evidence supporting market efficiency. It then describes his influential work developing the capital asset pricing model and the three-factor model, which related stock returns to market, size, and value factors.

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    of 8

    Two Pillars of Asset Pricing

    Lecture for the Sveriges Riksbank Prize in Economic


    Sciences in Memory of Alfred Nobel

    Eugene F. Fama
    Efficient Capital Markets

    A. Early Work

    B. Event Studies

    Rit = ai + biRMt + eit


    Figure 1 - Cumulative average residuals in the months surrounding a
    split

    0,44

    Cumulative average residual


    0,33

    0,22

    0,11

    0
    -30 -25 -20 -15 -10 -5 0 5 10 15 20 25 30
    Month relative to split month 0
    C. Predictive Regressions

    it+1 = Et(rt+1) + Et(πt+1)

    πt+1 = a + bit+1 + εt
    D. Time-Varying Expected Stock Returns

    Rt = a + bD/Pt-1 + eit

    E. “Bubbles”
    Asset Pricing Models

    A. Fama and MacBeth (1973)

    Rit = at + a1tbi + a2tMCi,t-1 + a3tB/Mi,t-1 + eit

    B. The Fatal Problems of the CAPM


    The Three-Factor Model

    E(Rit) - RFt = bi[E(RMt) – RFt] + siE(SMBt) + hi E(HMLt)

    The regression used to test the model is,

    Rit - RFt = ai + bi(RMt – RFt) + siSMBt + hiHMLt + eit


    Conclusions

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