The Journal of Finance

Asset Pricing at the Millennium

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00260

John Y. Campbell

This paper surveys the field of asset pricing. The emphasis is on the interplay between theory and empirical work and on the trade‐off between risk and return. Modern research seeks to understand the behavior of the stochastic discount factor (SDF) that prices all assets in the economy. The behavior of the term structure of real interest rates restricts the conditional mean of the SDF, whereas patterns of risk premia restrict its conditional volatility and factor structure. Stylized facts about interest rates, aggregate stock prices, and cross‐sectional patterns in stock returns have stimulated new research on optimal portfolio choice, intertemporal equilibrium models, and behavioral finance.

Asset Pricing at the Millennium

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00260

John Y. Campbell

This paper surveys the field of asset pricing. The emphasis is on the interplay between theory and empirical work and on the trade‐off between risk and return. Modern research seeks to understand the behavior of the stochastic discount factor (SDF) that prices all assets in the economy. The behavior of the term structure of real interest rates restricts the conditional mean of the SDF, whereas patterns of risk premia restrict its conditional volatility and factor structure. Stylized facts about interest rates, aggregate stock prices, and cross‐sectional patterns in stock returns have stimulated new research on optimal portfolio choice, intertemporal equilibrium models, and behavioral finance.

A Defense of Traditional Hypotheses about the Term Structure of Interest Rates

Published: 03/01/1986   |   DOI: 10.1111/j.1540-6261.1986.tb04498.x

JOHN Y. CAMPBELL

Expectations theories of asset returns may be interpreted either as stating that risk premia are zero or that they are constant through time. Under the former interpretation, different versions of the expectations theory of the term structure are inconsistent with one another, but I show that this does not necessarily carry over to the constant risk premium interpretation of the theory. I present a general equilibrium example in which different types of risk premium are constant through time and dependent only on maturity. Furthermore, I argue that differences among expectations theories are second‐order effects of bond yield variability. I develop an approximate linearized framework for analysis of the term structure in which these differences disappear, and I test its accuracy in practice using data from the CRSP government bond tapes.

Predictable Stock Returns in the United States and Japan: A Study of Long‐Term Capital Market Integration

Published: 03/01/1992   |   DOI: 10.1111/j.1540-6261.1992.tb03978.x

JOHN Y. CAMPBELL, YASUSHI HAMAO

This paper uses the predictability of monthly excess returns on U.S. and Japanese equity portfolios over the U.S. Treasury bill rate to study the integration of long‐term capital markets in these two countries. During the period 1971–1990 similar variables, including the dividend‐price ratio and interest rate variables, help to forecast excess returns in each country. In addition, in the 1980's U.S. variables help to forecast excess Japanese stock returns. There is some evidence of common movement in expected excess returns across the two countries, which is suggestive of integration of long‐term capital markets.

What Moves the Stock and Bond Markets? A Variance Decomposition for Long‐Term Asset Returns

Published: 03/01/1993   |   DOI: 10.1111/j.1540-6261.1993.tb04700.x

JOHN Y. CAMPBELL, JOHN AMMER

This paper uses a vector autoregressive model to decompose excess stock and 10‐year bond returns into changes in expectations of future stock dividends, inflation, short‐term real interest rates, and excess stock and bond returns. In monthly postwar U.S. data, stock and bond returns are driven largely by news about future excess stock returns and inflation, respectively. Real interest rates have little impact on returns, although they do affect the short‐term nominal interest rate and the slope of the term structure. These findings help to explain the low correlation between excess stock and bond returns.

Equity Volatility and Corporate Bond Yields

Published: 11/07/2003   |   DOI: 10.1046/j.1540-6261.2003.00607.x

John Y. Campbell, Glen B. Taksler

This paper explores the effect of equity volatility on corporate bond yields. Panel data for the late 1990s show that idiosyncratic firm‐level volatility can explain as much cross‐sectional variation in yields as can credit ratings. This finding, together with the upward trend in idiosyncratic equity volatility documented by Campbell, Lettau, Malkiel, and Xu (2001), helps to explain recent increases in corporate bond yields.

Explaining the Poor Performance of Consumption‐based Asset Pricing Models

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00310

John Y. Campbell, John H. Cochrane

We show that the external habit‐formation model economy of Campbell and Cochrane (1999) can explain why the Capital Asset Pricing Model (CAPM) and its extensions are betterapproximate asset pricing models than is the standard onsumption‐based model. The model economy produces time‐varying expected eturns, tracked by the dividend–price ratio. Portfolio‐based models capture some of this variation in state variables, which a state‐independent function of consumption cannot capture. Therefore, though the consumption‐based model and CAPM are both perfect conditional asset pricing models, the portfolio‐based models are better approximate unconditional asset pricing models.

A Model of Mortgage Default

Published: 02/06/2015   |   DOI: 10.1111/jofi.12252

JOHN Y. CAMPBELL, JOÃO F. COCCO

In this paper, we solve a dynamic model of households' mortgage decisions incorporating labor income, house price, inflation, and interest rate risk. Using a zero‐profit condition for mortgage lenders, we solve for equilibrium mortgage rates given borrower characteristics and optimal decisions. The model quantifies the effects of adjustable versus fixed mortgage rates, loan‐to‐value ratios, and mortgage affordability measures on mortgage premia and default. Mortgage selection by heterogeneous borrowers helps explain the higher default rates on adjustable‐rate mortgages during the recent U.S. housing downturn, and the variation in mortgage premia with the level of interest rates.

Stock Prices, Earnings, and Expected Dividends

Published: 07/01/1988   |   DOI: 10.1111/j.1540-6261.1988.tb04598.x

JOHN Y. CAMPBELL, ROBERT J. SHILLER

Long historical averages of real earnings help forecast present values of future real dividends. With aggregate U.S. stock market data (1871–1986), a vector‐autoregressive forecast of the present value of future dividends is, for each year, roughly a weighted average of moving‐average earnings and current real price, with between two thirds and three fourths of the weight on the earnings measure. We develop the implications of this for the present‐value model of stock prices and for recent results that long‐horizon stock returns are highly forecastable.

In Search of Distress Risk

Published: 11/11/2008   |   DOI: 10.1111/j.1540-6261.2008.01416.x

JOHN Y. CAMPBELL, JENS HILSCHER, JAN SZILAGYI

This paper explores the determinants of corporate failure and the pricing of financially distressed stocks whose failure probability, estimated from a dynamic logit model using accounting and market variables, is high. Since 1981, financially distressed stocks have delivered anomalously low returns. They have lower returns but much higher standard deviations, market betas, and loadings on value and small‐cap risk factors than stocks with low failure risk. These patterns are more pronounced for stocks with possible informational or arbitrage‐related frictions. They are inconsistent with the conjecture that the value and size effects are compensation for the risk of financial distress.

Structuring Mortgages for Macroeconomic Stability

Published: 05/24/2021   |   DOI: 10.1111/jofi.13056

JOHN Y. CAMPBELL, NUNO CLARA, JOÃO F. COCCO

We study mortgage design features aimed at stabilizing the macroeconomy. We model overlapping generations of borrowers and an infinitely lived risk‐averse representative lender. Mortgages are priced using an equilibrium pricing kernel derived from the lender's endogenous consumption. We consider an adjustable‐rate mortgage with an option that during recessions allows borrowers to pay only interest on their loan and extend its maturity. The option stabilizes consumption growth over the business cycle, shifts defaults to expansions, and enhances welfare. The cyclical properties of the contract are attractive to a risk‐averse lender so that the mortgage can be provided at a relatively low cost.

Who Owns What? A Factor Model for Direct Stockholding

Published: 03/07/2023   |   DOI: 10.1111/jofi.13220

VIMAL BALASUBRAMANIAM, JOHN Y. CAMPBELL, TARUN RAMADORAI, BENJAMIN RANISH

We build a cross‐sectional factor model for investors' direct stockholdings and estimate it using data from almost 10 million retail accounts in the Indian stock market. Our model identifies strong investor clienteles for stock characteristics, most notably firm age and share price, and for particular clusters of stock characteristics. These clienteles are intuitively associated with investor attributes such as account age, size, and diversification. Coheld stocks tend to have higher return covariance, inconsistent with simple models of diversification but suggestive that clientele demands influence stock returns.

Global Currency Hedging

Published: 01/13/2010   |   DOI: 10.1111/j.1540-6261.2009.01524.x

JOHN Y. CAMPBELL, KARINE SERFATY‐DE MEDEIROS, LUIS M. VICEIRA

Over the period 1975 to 2005, the U.S. dollar (particularly in relation to the Canadian dollar), the euro, and the Swiss franc (particularly in the second half of the period) moved against world equity markets. Thus, these currencies should be attractive to risk‐minimizing global equity investors despite their low average returns. The risk‐minimizing currency strategy for a global bond investor is close to a full currency hedge, with a modest long position in the U.S. dollar. There is little evidence that risk‐minimizing investors should adjust their currency positions in response to movements in interest differentials.

Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00318

John Y. Campbell, Martin Lettau, Burton G. Malkiel, Yexiao Xu

This paper uses a disaggregated approach to study the volatility of common stocks at the market, industry, and firm levels. Over the period from 1962 to 1997 there has been a noticeable increase in firm‐level volatility relative to market volatility. Accordingly, correlations among individual stocks and the explanatory power of the market model for a typical stock have declined, whereas the number of stocks needed to achieve a given level of diversification has increased. All the volatility measures move together countercyclically and help to predict GDP growth. Market volatility tends to lead the other volatility series. Factors that may be responsible for these findings are suggested.