Campbell Russell Harvey
Phone: (919) 660-7768
Fax: (919) 681-6246
Cel: (919) 815-8825
University of Chicago, 1986.
M.B.A. York University, 1983.
College, University of Toronto, 1981.
J. Paul Sticht Professor of International Business,
Fuqua School of Business, Duke University, [joined Duke University
Research Associate, National
Bureau of Economic Research, appointed in 1993.
Visiting Scholar, Board of Governors of the Federal Reserve Bank,
Visiting Professor of Finance, Swedish School of Economics and Business
Administration, Helsinki, Summer 1996.
Visiting Professor of Finance, Handelshogskogskolan I
Stockholm-(Stockholm School of Economics), Summer 1993.
Visiting Associate Professor of Finance, Graduate School of Business,
University of Chicago, September 1990 - August 1991.
Visiting Lecturer in Finance, Helsingin Kauppakorkeakoulu - (Helsinki
School of Economics), Summer 1990.
- ``The Real Term Structure and Consumption Growth,''
Journal of Financial Economics 22 (1988): 305-334.
- ``Forecasting Economic Growth with the Bond and Stock Markets,''
Financial Analysts Journal, September/October
(1989): 38-45. (P2)
- "Time-Varying Conditional Covariances in Tests of Asset Pricing
Models,'' Journal of Financial Economics 24 (1989):
- "Bayesian Inference in Asset Pricing Tests,'' with Guofu Zhou,
Journal of Financial Economics 26 (1990): 221-254.
- "The Variation of Economic Risk Premiums,'' with Wayne Ferson,
Journal of Political Economy 99 (1991): 285-315.
- ``The Term Structure and World Economic Growth,'' Journal of
Fixed Income 1 (1991): 4-17.
- ``Sources of Predictability in Portfolio Returns,'' with Wayne Ferson,
Financial Analysts Journal May/June (1991): 49-56.
- ``Les Taux d'Intérêt et la Croissance Economique en
France,'' Analyse Financière 86 (1991): 97-103.
- ``S & P 100 Index Option Volatility,'' with Robert Whaley,
Journal of Finance 46 (1991): 1551-1561.
- ``The World Price of Covariance Risk,'' Journal of
Finance 46 (1991): 111-157.
- ``Volatility in the Foreign Currency Futures Market,'' with Roger Huang,
Review of Financial Studies 4 (1991): 543-569.
- ``Interest Rate Based Forecasts of German Economic Growth,''
Weltwirtschaftliches Archiv 127 (1991): 701-718.
- ``Dividends and S&P 100 Index Option Valuation,'' with Robert Whaley,
Journal of Futures Markets 12 (1992): 123-137.
- ``Information and Volatility in the FX Market,'' with Roger Huang,
Finanzmarkt und Portfolio Management 6 (1992): 14-22.
- ``Seasonality and Consumption-Based Asset Pricing,'' with Wayne
Ferson, Journal of Finance 47 (1992): 511-552.
- ``Market Volatility Prediction and the Efficiency of the S&P
100 Index Option Market,'' with Robert Whaley, Journal of
Financial Economics 31 (1992): 43-73.
- ``Explaining the Predictability in Asset Returns,'' with Wayne Ferson,
Research in Finance 11 (1993): 65-106.
- ``The Term Structure Forecasts Economic Growth,''
Financial Analysts Journal May/June (1993): 6-8.
- ``Seasonality and Heteroskedasticity in Consumption-Based
Asset Pricing: An Analysis of Linear Models,'' with Wayne Ferson,
Research in Finance 11 (1993): 1-35.
- ``International Asset Pricing with Alternative Distributional
Specifications,'' with Guofu Zhou, Journal of Empirical
Finance 1 (1993): 107-131.
- ``The Risk and Predictability of International Equity Returns,''
with Wayne Ferson, Review of Financial Studies 6 (1993)
527- 566. (P21)
- ``Strategic Treasury Debt Management in Public Policy,'' Policy
Studies, Review 12 (1993): 76-89.
- ``National Risk and Global Fixed Income Allocation,'' with Claude
Erb and Tadas Viskanta, Journal of Fixed Income (Sept
1994): 17--26. (P23
- ``Sources of Risk and Expected Returns in Global Equity Markets,''
with Wayne Ferson, Journal of Banking and Finance (1994):
- ``Economic Activity Measures in Nonlinear Asset Pricing,''
Advances in Financial Economics (1995): 123-154.
- ``Country Credit Risk and Global Portfolio Selection,'' with
Claude Erb and Tadas Viskanta, Journal of Portfolio
Management (Winter 1995): 74-83.
- ``Forecasting International Equity Correlations,'' with Claude Erb
and Tadas Viskanta, Financial Analysts Journal (1994):
November/December 32-45. (P27)
- ``Do World Markets Still Serve as a Hedge?,'' with Claude Erb and
Tadas Viskanta, Journal of Investing (1995): Fall 23-46.
- ``The Cross-Section of Volatility and Autocorrelation in Emerging
Markets" Finanzmarkt und Portfolio Management 9 (1995):
- ``The Risk Exposure of Emerging Equity Markets,'' World Bank
Economic Review (1995): 19-50.
- ``Predictability and Time-Varying Risk in World Equity Markets,''
with Wayne Ferson, Research in Finance 13 (1995): 25-88.
- ``Predictable Risk and Returns in Emerging Markets,'' Review
of Financial Studies (1995): 773-816.
- ``Time-Varying World Market Integration,'' with Geert
Bekaert, Journal of Finance(1995): 403-444. [Lead
- ``Inflation and World Equity Selection,'' with Claude Erb and
Tadas Viskanta, Financial Analysts Journal, (1995):
November-December, 28-42. (P34)
Also in Japanese, Security Analysts Journal (1996):
Part I, October, 45-61; Part II, November, 84-90. (P34J)
- ``The Relation Between the Term Structure of Interest Rates and Canadian
Economic Growth,'' Canadian Journal of Economics
(1996): forthcoming. (P35)
- ``Expected Returns and Volatility in 135 Countries" with Claude Erb and
Tadas Viskanta, Journal of Portfolio Management
Spring 1996, pp. 46-58. (P36)
- ``Market Timing Ability and Volatility Implied in Investment
Newsletters' Asset Allocation Recommendations,'' with John
Graham, Journal of Financial Economics (1996):
- ``Political Risk, Financial Risk and Economic Risk,'' with Claude
Erb and Tadas Viskanta, Financial Analysts Journal
(1996): November/December 52:6, 28-46. (P38) [prev. W23]
Also in Japanese, Security Analysts Journal (1998):1
Part I, 109-119; (1998):2 Part II, 84-95. (P38J)
- ``The Influence of Political, Economic and Financial Risk on
Expected Fixed Income Returns," with Claude Erb and Tadas
Viskanta, Journal of Fixed Income (1996):
June 6:1, 7-31 [Lead article]. (P39)
- ``Emerging Equity Market Volatility,'' with Geert Bekaert,
Journal of Financial Economics (1997): 43:1, January, 29-78. (P40) [prev. W14]
- ``Demographics and International Investment," with Claude Erb and
Tadas Viskanta, Financial Analysts Journal (1997):
forthcoming. (P41)[prev. W27]
- ``Fundamental Determinants of International Equity Returns: A
Perspective on Conditional Asset Pricing," with Wayne Ferson,
Journal of Banking and Finance (1997): forthcoming. (P42)[prev. W7]
- ``The Making of an Emerging Market," with Claude Erb and Tadas Viskanta,
Emerging Markets Quarterly (1997) 1:1 14-19. (P43)
- ``Grading the Performance of Market Timing Newsletters," with
John Graham, Financial Analysts Journal (P44)[prev. W26]
- ``What Matters for Emerging Market Investment," with Geert Bekaert, Claude B. Erb and
Tadas E. Viskanta, Emerging Markets Quarterly (1997) 1:2, 17-46.
- ``Distributional Characteristics of Emerging Market Returns and Asset Allocation," with
Geert Bekaert, Claude B. Erb and Tadas E. Viskanta, Journal of Portfolio
Management (1998), Winter, 102-116. (P46)
- ``Measurement Error and Nonlinearity in the Earnings-Returns Relation of Large Firms,"
with Messod Beneish, Review of Quantitative Finance and Accounting,
(1998), 11, 219-247.(P47) [prev. W4]
- ``Emerging/Developed Market Portfolio Mixes," with Stefano M. F. G.
Cavaglia, Magnus Dahlquist, Peter L. Rathjens and Jarrod W.
Wilcox. Emerging Markets Quarterly (1997), Winter, 47-62. (P48) [prev. W29]
- ''The Future of Investment in Emerging Markets'' NBER Reporter,
Summer 1998, pp. 5-8. (P49)
- “Risk in Emerging Markets” with Claude B. Erb and Tadas E. Viskanta, The Financial Survey,
1998, July/August, pp.42-46. (P50) [prev. W39]
- “Contagion and Risk” with Claude Erb and Tadas Viskanta, in Emerging Markets Quarterly 2,
Summer 1998, pp. 46-64. (P51) [prev. W40]
- “A New Perspective on Emerging Market Bonds,” with Claude Erb and Tadas
Viskanta, Journal of Portfolio Management 1998 forthcoming
(P52) [prev. W36]
- ``Stock Selection in Emerging Markets: Portfolio Strategies for Malaysia,
Mexico and South Africa" with Dana Achour, Greg Hopkins and Clive Lang,
Emerging Markets Quarterly 1999, Winter, forthcoming (P53)
- ``Autoregressive Conditional Skewness,'' with Akhtar Siddique, Journal of Financial
and Quantitative Analysis 1999, forthcoming,
(P54) [prev. W22]
- ``Stock Selection in Malaysia" with Dana Achour, Greg Hopkins and Clive Lang,
Emerging Markets Quarterly 1999, Spring, forthcoming
- ``Conditional Asset Allocation in Emerging Markets,''
- ``Public Information and Fixed Income Volatility,'' with Roger Huang.
- ``The Impact of Federal Reserve Bank's Open Market Operations,''
with Roger Huang. (W3)
- ``The Specification of Conditional Expectations,'' (previous
title: ``Is the Expected Compensation for Market Volatility
- ``What Determines Expected International Asset Returns?'' with
Bruno Solnik and Guofu Zhou. (W8)
- ``Global Risk Exposure to a Trade-Weighted
Currency Index,'' (W10)
- ``Forecasting Foreign Exchange Market Returns via Entropy Based
Coding: The Framework,'' with Arman Glodjo.
- ``Conditional Skewness in Asset Pricing Tests,'' with Akhtar Siddique.
- ``Analytic Tests of Linear Factor Models,'' with Chris Kirby.
- ``Performance Evaluation in the Presence of Dynamic Trading
Strategies,'' with Ravi Bansal.
- ``Efficient Online Non-Parametric Density Estimation," with Christophe
G. Lambert, Scott E. Harrington, Nathan D. Bronson and Arman Glodjo.
- ``Foreign Speculators and Emerging Equity Markets," with Geert Bekaert.
- ``Conditioning Variables and the Cross-Section of Stock Returns,"
with Wayne Ferson. (W32)
- ``Are Common Swings in International Stock Returns Justified by Subsequent Changes in National Outputs," with Bernard Dumas and Pierre Ruiz (W34)
- ``The International Cost of Capital and Risk Calculator,"
- ``Dating the Integration of World Capital Markets," with Geert Bekaert and
Robin Lumsdaine, (W38)
- ``Structural Breaks in Emerging Market Capital Flows," with Geert Bekaert and
Robin Lumsdaine, (W39)
Work in Progress
- ``The Cost of Capital in Emerging Markets,'' with Geert Bekaert.
- ``Capital Markets: An Engine for Economic Growth,'' with Geert Bekaert,
Books, Chapters, Monographs
- ``An Exploratory Investigation of the Fundamental Determinants
of National Equity Market Returns,'' with Wayne Ferson, in Jeffrey
Frankel, Editor, The Internationalization of Equity
Markets, (Chicago: University of Chicago Press, 1994,
pp. 59-138). (C1)
- ``Portfolio Enhancement using Emerging Markets and Conditioning
Information,'' in Stijn Claessens and Shan Gooptu, Eds.,
Portfolio Investment in Developing Countries,
(Washington: The World Bank Discussion Series, 1993, pp. 110-144).
- ``The World Price of Covariance Risk," in Stanley Stansell, Editor,
International Financial Market Integration, (London: Basil
Blackwell, 1993, pp. 187-234). (C3)
- ``la Capacità Previsiva della Struttura per Scadenza dei
Tassi d'Interesse Italiani in Relazione alla Crescita
Economica Reale,'' with Sidhartha Kaul and Chris M. Kirby,
Serie Economica, 1990, CRF Gruppo IMI.
- ``The Contribution of Speculators to Effective Financial Markets,''
with Geert Bekaert and Márcio G.P. Garcia, Catalyst
Monograph Series, 1995, Catalyst Institute.
- ``The Role of Capital Markets in Economic Growth,'' with Geert
Bekaert and Márcio G.P. Garcia, Catalyst Monograph
Series, 1995, Catalyst Institute.
- ``Capital Markets: An Engine for Economic Growth,'' with Geert
Bekaert, Catalyst Monograph Series, 1995, Catalyst
- ``Instrumental Variables Estimation of Conditional Beta Pricing
Models,'' with Christopher Kirby, Handbook of
Statistics 14, G.S. Maddala, C.R. Rao and
H.D. Vinod, Eds., North Holland,
1996, forthcoming. (C8)
- ``The Risk Exposure of Emerging Equity Markets," in Investing
in Emerging Markets Mike J. Howell, Ed., London, 1994, pp.
116-174. [Expanded version of W30]. (C9)
- ``The Behavior of Emerging Market Returns," with Geert Bekaert,
Claude Erb and Tadas Viskanta, in The Future of Emerging
Market Capital Flows, Edward Altman, Richard Levich and
Jianping Mei, Eds., 1997, (Kluwer) forthcoming.
(C10) [prev. W25]
- ``The Cross-Sectional Determinants of Emerging Equity Market Returns,"
with Geert Bekaert, Claude Erb and Tadas Viskanta, in
Peter Carman, ed.,
Quantitative Investing ofr the Global Markets: Strategies,
Tactics, and Advanced Analytical Techniques, 1997,
(Chicago: Glenlake Publishing), 221-272. (C11)
- ``The Risk and Expected Returns of Aftrican Equity Investments," with
Claude Erb and Tadas Viskanta, in Cathy Pattillo, Ed., Risk
and Agencies of Restraint: Reducing the Perceived Risks of African
Investment, (MacMillan), forthcoming. (C12) [prev. W30]
- Country Risk in Global Financial Management, with Claude B. Erb and Tadas E.
Viskanta, forthcoming, AIMR, 1997. (C13) [prev. W33]
- ``Capital Flows and the Behavior of Emerging Market
Equity Returns," with Geert Bekaert, in Sebastian Edwards, Capital Inflows to Emerging Markets
NBER and University of Chicago Press, 1998, forthcoming. (C14) [prev. W37]
- ``The Econometrics of Financial Markets," Journal of Finance (1998) 53,
- Commentary on ``A Test of International CAPM Using Business
Cycle Indicators as Instrumental Variables,'' in
Internationalization of Equity Markets, (Chicago:
University of Chicago Press, 1994, pp. 50--54).
- Commentary on ``Emerging Stock Markets and International Asset
Pricing,'' in Stijn Claessens and Shan Gooptu, Eds., Portfolio
Investment in Developing Counties, (Washington: The World Bank
of Discussion Series, 1994, pp. 183-184).
- Commentary on ``Testing the Unbiasedness in Foreign Exchange
Markets: The Effects of Price Limits,''Review of Futures
Markets 7 (1988): 167-172.
- ``Managing the Maturity Structure of Treasury Debt &The Role
of Floating-Rate Treasury Bonds,'' Presentation to the Hearings
on President Clinton's Plan for Public Investment and Deficit
Reduction Committee on Ways and Means of the United States
House of Representatives, 103rd Congress, First Session, (1993):
103-127, pp. 1644-1649. (POLICY1)
Executive Education Materials
- Value and Risk Management Through Derivatives
- Lessons in Risk Management
- Option Valuation in Corporate Fiance
- Value Creation (PM4)
- Long-term value
- International perspective
- Value added metrics
- Discounted cash flow metrics
- Value management
- Risk Magagement and value
- Financial engineering
- Active Investment in Developed and Emerging Markets
- Why invest internationally?
- Foreign exchange risk
- Emerging markets
- Managing in bull and bear markets
- Managing in low and high volatility markets
- Portfolio strategy and the business cycle
- Inflation and world equity returns
- Do world markets still serve as a hedge?
- What about Mexico?
- Time-varing International Correlations: Implications for Global
- Predictable Returns in Developed and Emerging Markets
- Return Prediction for Dynamic Trading Strategies
- Mathematics for Finance (PM9)
- Emerging Markets: Opportunities and Risks
- An Introduction to Conditional Asset Allocation
- The Implications of Predictable Returns in Asset Markets
- Global Financial Management and Country Risk
- Stock Market Predictability and Active Asset Allocation
in Emerging and Mature Markets (
- Towards a Truly Global Portfolio Strategy: New Directions in
Dynamically Forecasting and Comparing the Risk and Returns of Worldwide
- Outperforming in Emerging Markets: Using Quantitative Methods (
- Active Asset Allocation: Does it Work? (PM17)
- What Matters for Emerging Markets Investments (PM18)
- I. Recent Advances in Cost of Capital Measurement; II. Global Financial Management
and Shareholder Value (PM19)
- An Introduction to Dynamic Global Financial Management (PM20)
- Emerging Markets: Unsolved Puzzles (PM21)
- Emerging Market Debt: A Global Perspective (PM22)
- Cross-Sectional Prediction in Dynamic Trading Strategies(PM23)
- Stock Selection in Emerging Markets (PM24)
- Conditioning Variables and the Cross-Section of Stock Returns(PM25)
Financial Economics, 1995-2001.
Associate Editor, Review of Financial Studies, 1991-1994
[3 year term].
Advisory Board, Financial Economics Network's Capital Markets Journal
Advisory Board, Financial Economics Network's Course Journal
Associate Editor, Journal of Financial and Quantitative
Associate Editor, Journal of Empirical Finance,
Associate Editor, Journal of Banking and Finance,
Associate Editor, Journal of International Financial Markets,
Institutions and Money, 1996-present.
Associate Editor, Journal of Fixed Income,
Associate Editor, Pacific-Basin Finance Journal,
Advisory Editor, European Journal of Finance,
Program Committee, Western Finance Association Meetings, 1989,
Program committee, American Finance Association Meetings, 1996
- Batterymarch Fellowship, 1993-1994.
- Nationsbank Faculty Award, Fuqua School of Business, 1994.
- Graham and Dodd Scroll for excellence in financial writing for "Demographics and
International Investments," Financial Analysts Journal, 1997.
- Graham and Dodd Scroll for excellence in financial writing for "Political Risk, Economic
Risk and Financial Risk," Financial Analysts Journal, 1996.
- Institute for Research in Quantitative Finance, Second Prize in the
Roger F. Murray Prize Competition for ``Do World Markets Still
Serve as a Hedge,'' 1995.
- Graham and Dodd Scroll, 1995 for excellence in financial writing for
``Inflation and World Equity Returns" Financial Analysts
- American Association of Individual Investors Award for the Best
Paper in Investments for ``Predictable Risk and Returns in Emerging
- Smith-Breeden Distinguished Paper Nomination for ``Time-Varying World
Market Integration," Journal of Finance, 1995.
- Smith-Breeden Distinguished Paper Nomination for ``Seasonality
and Consumption-Based Asset Pricing,'' Journal of Finance,
- Smith-Breeden Distinguished Paper Award for ``The World Price of
Covariance Risk,'' Journal of Finance, 1991.
- Graham and Dodd Scroll for excellence in financial writing for
``Sources of Predictability in Portfolio Returns,'' Financial
Analysts Journal, 1991.
- Richard L. Rosenthal Award, 1989-90.
- Outstanding Teacher Award, Fuqua School of Business, 1987-88.
- Full Scholarship, University of Chicago, 1983-86.
- Doctoral Fellowship, Social Sciences and Humanities Research
Council of Canada, 1984-86.
- Graduated first in M.B.A. class of 1983.
- Financial Management [Duke University - 1st year MBA]
- Average Rating over 17 sections (1987-97):6.16/7.00
- Investment Analysis and Portfolio Management
[Duke University - 2nd year MBA]
- Average Rating over 7 sections (1987-93):6.48/7.00
- International Asset Pricing [Duke University - 2nd year MBA]
- Average Rating over 2 sections (1994-98): 6.37/7.00
- Investment [University of Chicago - 1st year MBA]
- Average Rating over 4 sections (1991): 4.55/5.00
- Average Rating over 2 sections (1995): 4.70/5.00
- Empirical Asset Pricing - Ph.D. [Helsingin Kauppakorkeakoulu (1990)],
[Handelshögskogskolan I Stockholm (1993)],
[Swedish School of Economics and Business Administration (1996)]
- William Davidson Institute, University of Michigan, 1996-97.
- Business Associates Fund, Duke University, 1987-93.
- University Research Council Grant, Duke University, 1987-88.
- Center for Research in Security Prices, University of Chicago,
Professor Harvey has wide-ranging consulting experience. He currently holds two directorships
is a consultant to some of the world's leading asset management firms. Harvey specializes in the
construction of global equity and fixed income allocation models. Additional details are available
- TV: 5 interviews on CNBC, 2 on CNN.
- Press: research featured in 8 New York Times, 4 Wall
Street Journal, 3 Business Week, and 1 Forbes.
Numerous wire stories on AP, Reuters, and
Bloomberg. Example, "The Graham-Harvey Test,"
Forbes, June 19, 1995.
Overview of Research
1. Unifying theme
All of my research projects have a common thread: time-varying expected
returns and risks and their implications for both understanding the
behavior of asset prices in both domestic and international settings.
The ideas that expected returns and risks shift through time is
well-accepted today. However, when I started my research program this
idea was controversial. For years, finance had focused on models
where both risk and expected returns were constant through time. When
evidence of predictable returns surfaced, many thought that the
existence of any predictable variation implied a violation of the
``efficient market hypothesis.'' I think my main contribution is to show
that predictability can be consistent with rational asset pricing. My
JPE91 with Wayne Ferson measured the
amount of predictability induced by changing risk exposures and
changing risk premiums. We showed that an economic asset pricing model
produced predictability that closely matched what others had
documented statistically. I continued to refine these models that
incorporated time-varying risk and expected returns. I found avenues
to explore in international asset pricing, performance evaluation and
the practical problem of portfolio selection.
2. Term structure models
My research began with a study of the consumption-based asset pricing
model. The framework of Robert Lucas (1978) implied a general
time-variation in asset returns and risks. This framework was
empirically tested by Lars Hansen and Kenneth Singleton (1982). These
two papers along with class lectures of Lucas, Hansen and Sanford
Grossman suggested a starting point for my research. I wrote down the
linearized version of the Lucas model and noticed that there was
potential information in the real term structure of interest rates
that was relevant for forecasting the future path of consumption. My
dissertation work (which was subsequently published as ``The Real Term Structure and Consumption
Growth'' JFE88) explored the implications of this model. I
subsequently published a number of papers exploring the information in
the term structure of interest rates in both the U.S. and other
countries. In this research area, my work has had impact on the
practice of management. Many companies use forecasting models based on
this work to track expected economic growth.
While my early research focussed on the implications of the
consumption-based model, I always remembered the advice of my
dissertation advisor, Gene Fama, ``you must hedge your research
portfolio especially with respect to this model.'' This particular
research line ended with my ``Seasonality and
Consumption-Based Asset Pricing'' JF92 with Wayne Ferson. In this
paper, we explored numerous twists to the basic model and were unable
to salvage the standard framework to explain both the time-series and
cross-section of expected returns. While I believe that this is a
good paper, its impact is limited by the move in the profession away
from the consumption model. Nevertheless, I learned a tremendous
amount from this research program (and in particular from Wayne
Ferson) that led to some other asset pricing frameworks.
3. Asset Pricing Frameworks
My JFE89, ``Time-Varying Conditional
Covariances in Asset Pricing Tests'' draws heavily from my joint
work with Ferson. In trying to salvage a linear consumption model, we
tried many different formulations of the risk function. In my JFE89, I
apply some of these formulations (and develop new ones) to versions of
the Sharpe-Lintner asset pricing model as well as alternative
multifactor models. The advantage of the formulation is that it
provides for general covariance dynamics without explicitly
parameterizing these dynamics. As such, the instrumental variables
approach provided an alternative to other approaches (in particular to
the GARCH family of models).
Ferson and I jointly studied an approach that incorporated
time-varying risk and returns in our ``The
Variation of Economic Risk Premiums'' JPE91. The genesis of this
paper was the controversy regarding the attribution of predictability
in asset returns: Was it due to rational asset pricing implications or
was it due to market imperfections and/or irrational behavior on the
part of investors? We noted that most of the asset pricing tests had
been conducted within the paradigm of constant expected returns and
risks. Our contribution was to study a multifactor model that allowed
for general time-variation in asset returns and risk. We detailed an
economic interpretation of the changes in economic risk premiums
through the business cycle. We measured the ``statistical
predictability'' of asset returns (i.e., from projecting asset returns
on some, perhaps data-mined, set of predictors) and compared this
predictability with that implied by asset pricing specification. We
found that 85% of the predictability could be attributed to the asset
pricing dynamics. While we could not eliminate the possibility of
market imperfections causing some predictability, I think that the
strength of our results tilted the balance of opinion toward rational
asset pricing interpretations.
My final examination of domestic asset pricing question incorporates
investigators' prior beliefs into the problem (``Bayesian Inference in Asset Pricing Tests''
with Guofu Zhou in JFE90). This paper examines unconditional asset
pricing restrictions. However, the twist is that information (in the
form of the investigator's prior belief) is incorporated into the
analysis. The paper proposes a methodology for a full Bayesian
analysis of asset pricing models. We use Monte Carlo integration to
evaluate complicated posterior densities. This is a methodology
paper. While Bayesian approaches are very appealing, there has been a
hesitation to apply these methodologies because of the intense
requirement of computational resources. I envision future researchers
using our ideas as Bayesian analysis becomes more common place.
I used the framework of my JFE89 to study expected international
returns and risk in ``The World Price of
Covariance Risk,'' published in JF91. I was very nervous about my
initial submission to the JF because the framework of the paper
appeared too similar to my JFE89. However, this paper was one of the
first attempts to study international asset prices in a conditional
(time-varying returns and risk) framework. Using data through mid
1989, I found that a single factor model did a reasonable job of
accounting for the time-series and cross-section of expected returns
with the exception of one country - Japan. In that country, the
expected returns were too high given the risk (implying share prices were too high).
Ferson and I provided a comprehensive examination of expected
international returns in our ``The Risk and
Predictability of International Equity Returns'' RFS93. We
addressed two issues. First, we abandoned the multistep estimation
approach that we used in our JPE91. Second, we presented a multifactor
framework which generalized the single factor results of my JF91. We
found that the multifactor model could account for most of the
predictable variation in asset returns. We found that most of the
variation was being driven by a single world factor (consistent with
my JF91). However, we also found an important, but smaller role for a
foreign currency factor.
Next, I moved to emerging capital markets. These high profile markets
had little academic attention mainly because of the costs associated
with obtaining the data. In return for presenting a paper at a World
Bank conference, the International Finance Corporation gave me their
data. My ``Predictable Risk and Returns in
Emerging Markets'' RFS95 provides a comprehensive analysis of
these data. Within the framework of a world asset pricing model, I
present sharp rejections. In particular, in terms of the usual risk
measures, these markets have essentially zero risk. As a result, their
returns are ``too high'' to be consistent with the world asset pricing
models. The models also fail to account for predictability of these
The RFS95 explored a world asset pricing model applied to emerging
equity markets. That is, the risk was measured with respect to world
factor benchmarks. This model assumes that each capital market is
perfectly integrated into world capital markets. But this is one of
three possible approaches to the problem. The second involved the
assumption that the capital market was completely segmented (then
risk is measured with respect to local factors). The third is
the assumption of partial integration. Those that implemented
this third approach fixed the degree of integration through time
(constant influence of world and local factors).
This third model provided the origins of my collaboration with Geert
Bekaert. At the World Bank conference, we talked about generalizing
the partial integration framework to allow for the possibility that
the degree of integration changes through time. This squared with our
intuition that some countries had become more integrated through time
(like Thailand) and other countries less integrated (like Zimbabwe).
We provided the first attempt to capture time-variation market
integration in ``Time-Varying World Market
Integration'' JF95. Of course, in a general model of time-varying
integration, there may be demand to hedge changes in integration over
time. This is not modeled in our framework and we make the reader
aware of this limitation. Nevertheless, our paper presents a number of
interesting results. In addition, we provide an alternate
characterization of our work as tracing the influence of world
vs. local factors on time-varying expected returns.
Another limitation of the JF95 is that the influence of the world and
local factors through the variance is not modeled. Bekaert and I
recently realized that given the persistence in variances and
covariances, it might be more fruitful to examine a similar framework
with respect to variances and covariances. In ``Emerging Equity Market Volatility''
(JFE97), we present a world factor model that allows for
changing influences of world vs. local factors on both the mean
returns and the variance dynamics. This paper also presents an attempt
to understand why variances differ across countries and why variances
shift through time.
4. Other markets
My research theme has been extended to other markets as well. In my
work with Roger Huang, we study time-varying ``Volatility in the Foreign Currency Futures
Market'' RFS91. We also have a working paper which studies the
volatility impact of the size and type of Federal Reserve open market
operation (see W3) . In my work with
Robert Whaley in ``Market Volatility
Prediction and the Efficiency of the S&P 100 Index Option Market''
JFE92 and ``S&P 100 Index Option
Volatility'' JF91, we study the implications of time-varying
volatility in the options market. We present a model which forecasts
implied volatility of the S&P 100 index option and develop trading
strategies to assess whether the predictability leads to arbitrage
5. Recent Research 1997-1998
I have a number new projects.
The first is with Ferson, ``Country Risk
and Asset Pricing.'' The goal of this paper is to provide a unified
framework for assessing risk and asset selection in a global
context. We provide a new framework for evaluating country risk. Our
results also provide a possible interpretation to the recent domestic
evidence that fundamental variables (like price-to-book ratios) impact
the cross-section of expected returns. Our framework provides a
theoretically consistent way for fundamental information to affect
expected returns through the risk function. This paper was recently accepted at the
The second project is with John Graham. In ``Market Timing Ability and Volatility
Implied in Investment Newsletters' Asset Allocation
Recommendations,'' we study the asset allocation recommendation of
237 newsletter strategies. The data are newsletters' suggested
investment proportions in equity and cash (Treasury bills or CDs). We
provide the first analysis of the performance of these newsletters and
whether the letters have any ability to ``time the market'' (increase
equity weight before the market rises and decrease weight before
market declines). Consistent with my other research, we try to control
for market wide time-varying expected returns and risks. This paper was recently published in
The third project is with Ravi Bansal, ``Dynamic Trading Strategies''. We cast the challenging
evaluation problem in the context of Hansen and Richard (1987) and
Hansen and Jagannathan (1991). We propose an alternative method of
assigning risk to strategies. We detail a trading strategy which uses
three benchmark assets which have futures contracts trading on
them. We show that this strategy, which is based on publicly available
information, ``beats the market'' when the traditional performance
evaluation criteria are used. This paper is chocked full of
interesting results which hopefully will affect the practice of
performance measurement in the future.
The fourth project is with Arman Glodjo, ``Forecasting Foreign Exchange Market
Returns via Entropy Coding.'' My collaboration with Glodjo began
when he was a student in the Computer Science department. I quickly
realized that some of the techniques used for data compression and
caching problems were ideal for the study of time-varying expected
returns at the high frequency level. In this paper, we present a
remarkably simple framework to detect variation in returns.
The fifth project is with Bruno Solnik and Guofu Zhou, ``What Determines Expected International
Asset Returns?'' In contrast to my previous work, this project
uses a latent factor technique to study stock and bond returns. The
advantage of this technique is that you need not specify the risk
factors in advance. We offer a number of new twists. First, we
recover the fitted risk premiums and characterize their time-variation
with respect to the world business cycle. Second, we show that similar
forces drive expected stock and bond returns. Third, we study the role
of exchange rate risk in expected returns.
The sixth project is with Christopher Kirby, ``Analytic Tests of Linear Factor
Models.'' The paper provides a general framework for deriving
analytical test statistics for a wide variety of models. Consistent
with my previous work, among these models are those which allow for
time-varying risk and returns.
The seventh project is with Siddique, ``Conditional skewness in asset pricing
tests.'' We believe that conditional skewness has long been
overlooked by the mean-variance paradigm. We examine a model that
incorporates skewness and assess its ability to explain both the
time-series and cross-section of expected returns. Our results suggest
that some of recent evidence that fundamental variables explain the
cross-section of expected returns is due to these variables proxying
for conditional skewness.
6. On the horizon
I have an exciting new initiative with Bekaert, ``Foreign Speculators and Emerging Equity Markets.''
In this work, we examine the impact of regulatory changes, ADRs and Country Funds on the cost
capital, volatility and correlations in 20 emerging market. We also investigate new data on
I also have an exciting project in the early stages with Bernard Dumas.
We look at the economic linkages between countries, for example, the correlations between
real economic growth. We use an economic model to predict what the equity correlations
between countries should be. Our is the first attempt to try to explain the patterns of correlations
In a way, my research has come full circle. I started with an
economic model where implications about economic activity were
recovered from expected returns. I then used models relying exclusively
on financial information to understand variation in expected returns.
I am now back to the stage where I am now trying to understand the
linkages between the financial markets and the real economy. While
I might be back where I started, I have learned much on my journey.
Additional details available on request.
Updated July 1997