Essays on conditional asset pricing models

Abstract

This thesis contains three essays on conditional asset pricing models. The first essay develops a conditional version of the consumption capital asset pricing model (CCAPM) using the conditioning variable from the cointegrating relation among macroeconomic variables (dividend yields, term spread, default spread, and short-term interest rate). It has two findings. First, the conditioning variable has a strong power to predict market excess returns in the presence of competing predictive variables. Second, this conditional CCAPM performs about as well as Fama and French``s (1993) three-factor model in explaining the cross-section of the Fama and French 25 size and book-to-market sorted portfolios. This specification lends support to the risk-based story since it shows value stocks are riskier than growth stocks in bad times. The second one asks whether Chen and Zhang``s (2009) new factors are risk factors. Given the striking empirical performance of the Chen and Zhang``s (2009) new three-factor model, this essay investigates whether the new factors are risk factors using the expected market risk premium as a proxy for the states of the world. Our empirical findings show that the new factors, INV and ROA, are risk factors because (1) the INV and ROA underperform in some states of the economy and underperformance coincides with bad states, (2) the conditional betas of the INV and ROA are higher in bad states than conditional betas in good states, and (3) the beta-premium sensitivities of the INV and ROA are positive. The third one investigates the investment styles and performance persistence of equity funds in Korea employing the conditional asset pricing models, which are the conditional Fama and French three-factor model (1993) as well as the Carhart four-factor model (1997). It has two findings. First, unlike the evidence from the US, most equity funds in Korea perform better than the overall stock market and positive performance that did exist does persis...