Non-agency mortgage-backed securities (MBS) are typically priced and traded on discounted cashflow basis where a cashflow projection is made under a prepayment and default scenario and discounted with a discount margin (DM) that supposedly measures credit risk. Whilest simple and intuitive to...

Robert C. Merton is the School of Management Distinguished Professor of Finance at Massachusetts Institute of Technology, and the John and Natty McArthur University Professor Emeritus at Harvard University. Merton received the Alfred Nobel Memorial Prize in Economic Sciences in 1997 for a new...

Financial basics and intuition stresses the importance of investment horizon for risk management and asset allocation. However, the beta parameter of the Capital Asset Pricing Model (CAPM) is invariant to the holding period. Such contradiction is due to the assumption of long-term independence...

Investors show different behaviour in falling markets and in rising markets. This paper demonstrates that the beta of individual stocks varies across the entire return distribution and that the variation depends on the frequency of the returns. While there is a symmetric u-shape increase for...

We introduce an ensemble learning method based on Gaussian Process Regression (GPR) for predicting conditional expected stock returns given stock-level and macro-economic information. Our ensemble learning approach significantly reduces the computational complexity inherent in GPR inference and...

We develop a finite-sample procedure to test the beta-pricing representation of linear factor pricing models that is applicable even if the number of test assets is greater than the length of the time series. Our distribution-free framework leaves open the possibility of unknown forms of...

Does extreme downside risk require a risk premium in the pricing of individual assets? Extreme downside risk is a conditional measure for the co-movement of individual stocks with the market, given that the state of the world is extremely bad. This measure, derived from statistical extreme value...

I examine moment characteristics and predictability assumptions of dynamic asset pricing models. I propose a new measure --- the generalized entropy --- to summarize moment information of the multi-horizon pricing kernel for a dynamic model. Both static and dynamic strategy returns impose robust...