Modigliani and Cohn [1979] hypothesize that the stock market suffers from money illusion, discounting real cash flows at nominal discount rates. While previous research has focused on the pricing of the aggregate stock market relative to Treasury bills, the money-illusion hypothesis also has...

Most previous research tests market efficiency and asset pricing models using average abnormal trading profits on dynamic trading strategies, and typically rejects the joint hypothesis. In contrast, we measure the ability of a simple risk model and the efficient-market hypothesis to explain the...

Modigliani and Cohn's (1979) hypothesis suggests that time-variation in the level of inflation causes the market's subjective expectation of the future equity premium to deviate systematically from the rational expectation. When inflation is high (low), the rational equity-premium expectation is...

A large body of literature suggests that firm-level stock prices 'underreact' to news about future cash flows, i.e., shocks to a firm's expected cash flows are positively correlated with shocks to expected returns on its stock. We estimate a vector autoregession to examine the joint behavior of...

We decompose the cross-sectional variance of firms' book-to-market ratios using both a long U.S. panel and a shorter international panel. In contrast to typical aggregate time-series results, transitory cross-sectional variation in expected 15-year stock returns causes only a relatively small...

SUBJECT AREAS: Careers amp; career planning, Efficient markets, Finance, Financial instruments, Investment management, Securities, Stocks, Success CASE SETTING: Santa Monica, CA; investment management; $200 million revenues; 150 employees; 2002Dimensional Fund Advisors (DFA) is an investment...

SUBJECT AREAS: Assets, Brand management, Cash flow, Cash management, Finance, Financial analysis, Insurance, Investments, Present value, Product management, Regression analysis, Service industry, Sports, Statistical analysis, ValuationCASE SETTING: Texas; sports/entertainment; $126.5 million...

This paper seeks to better describe the characteristics that explain the cross section of average stock returns. Fama and French (FF) (1993) argue that book-to-market ratio (BE/ME) proxies for risk which investors require a premium for assuming. An alternative hypothesis proposed by Daniel and...

A recent paper of Kothari, Shanken, and Sloan (1995) (KSS) examines the argument of Fama and French (FF) (1992) that, contrary to the Sharpe-Lintner-Black (SLB) model, book-to-market ratio plays an important role in expected asset returns while market beta does not. KSS claim that part of the...