The Journal of Finance

Changes in Expected Security Returns, Risk, and the Level of Interest Rates

Published: 12/01/1989   |   DOI: 10.1111/j.1540-6261.1989.tb02650.x

WAYNE E. FERSON

Regressions of security returns on treasury bill rates provide insight about the behavior of risk in rational asset pricing models. The information in one‐month bill rates implies time variation in the conditional covariances of portfolios of stocks and fixed‐income securities with benchmark pricing variables, over extended samples and within five‐year subperiods. There is evidence of changes in conditional “betas” associated with interest rates. Consumption and stock market data are examined as proxies for marginal utility, in a general framework for asset pricing with time‐varying conditional covariances.

DISCUSSION

Published: 07/01/1986   |   DOI: 10.1111/j.1540-6261.1986.tb04524.x

WAYNE E. FERSON

Are the Latent Variables in Time‐Varying Expected Returns Compensation for Consumption Risk?

Published: 06/01/1990   |   DOI: 10.1111/j.1540-6261.1990.tb03696.x

WAYNE E. FERSON

Multibeta asset pricing models are examined using proxies for economic state variables in a framework which exploits time‐varying expected returns to estimate conditional betas. Examples include multiple consumption‐beta models and models where asset returns proxy for the state variables. When the state variables are not specified, the tests indicate two or three time‐varying expected risk premiums in the sample of quarterly asset returns. Conditional betas relative to consumption generate less striking evidence against the model than betas relative to asset returns, but both the consumption and the market variables fail to proxy for the state variables.

Measuring Fund Strategy and Performance in Changing Economic Conditions

Published: 06/01/1996   |   DOI: 10.1111/j.1540-6261.1996.tb02690.x

WAYNE E. FERSON, RUDI W. SCHADT

The use of predetermined variables to represent public information and time‐variation has produced new insights about asset pricing models, but the literature on mutual fund performance has not exploited these insights. This paper advocates conditional performance evaluation in which the relevant expectations are conditioned on public information variables. We modify several classical performance measures to this end and find that the predetermined variables are both statistically and economically significant. Conditioning on public information controls for biases in traditional market timing models and makes the average performance of the mutual funds in our sample look better.

Spurious Regressions in Financial Economics?

Published: 07/15/2003   |   DOI: 10.1111/1540-6261.00571

Wayne E. Ferson, Sergei Sarkissian, Timothy T. Simin

Even though stock returns are not highly autocorrelated, there is a spurious regression bias in predictive regressions for stock returns related to the classic studies of Yule (1926) and Granger and Newbold (1974). Data mining for predictor variables interacts with spurious regression bias. The two effects reinforce each other, because more highly persistent series are more likely to be found significant in the search for predictor variables. Our simulations suggest that many of the regressions in the literature, based on individual predictor variables, may be spurious.

Conditioning Variables and the Cross Section of Stock Returns

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00148

Wayne E. Ferson, Campbell R. Harvey

Previous studies identify predetermined variables that predict stock and bond returns through time. This paper shows that loadings on the same variables provide significant cross‐sectional explanatory power for stock portfolio returns. The loadings are significant given the three factors advocated by Fama and French (1993) and the four factors of Elton, Gruber, and Blake (1995). The explanatory power of the loadings on lagged variables is robust to various portfolio grouping procedures and other considerations. The results carry implications for risk analysis, performance measurement, cost‐of‐capital calculations, and other applications.

The Efficient Use of Conditioning Information in Portfolios

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00351

Wayne E. Ferson, Andrew F. Siegel

We study the properties of unconditional minimum‐variance portfolios in the presence of conditioning information. Such portfolios attain the smallest variance for a given mean among all possible portfolios formed using the conditioning information. We provide explicit solutions for n risky assets, either with or without a riskless asset. Our solutions provide insights into portfolio management problems and issues in conditional asset pricing.

Seasonality and Consumption‐Based Asset Pricing

Published: 06/01/1992   |   DOI: 10.1111/j.1540-6261.1992.tb04400.x

WAYNE E. FERSON, CAMPBELL R. HARVEY

Most of the evidence on consumption‐based asset pricing is based on seasonally adjusted consumption data. The consumption‐based models have not worked well for explaining asset returns, but with seasonally adjusted data there are reasons to expect spurious rejections of the models. This paper examines asset pricing models using not seasonally adjusted aggregate consumption data. We find evidence against models with time‐separable preferences, even when the models incorporate seasonality and allow seasonal heteroskedasticity. A model that uses not seasonally adjusted consumption data and nonseparable preferences with seasonal effects works better according to several criteria. The parameter estimates imply a form of seasonal habit persistence in aggregate consumption expenditures.

Tests of Asset Pricing with Time‐Varying Expected Risk Premiums and Market Betas

Published: 06/01/1987   |   DOI: 10.1111/j.1540-6261.1987.tb02564.x

WAYNE E. FERSON, SHMUEL KANDEL, ROBERT F. STAMBAUGH

Tests of asset‐pricing models are developed that allow expected risk premiums and market betas to vary over time. These tests exploit the relation between expected excess returns and current market values. Using weekly data for 1963 through 1982 on ten common stock portfolios formed according to equity capitalization, a single‐risk‐premium model is not rejected if the expected premium is time varying and is not constrained to correspond to a market factor. Conditional mean‐variance efficiency of a value‐weighted stock index is rejected, and the rejection is insensitive to how much variability of expected risk premiums is assumed.

General Tests of Latent Variable Models and Mean‐Variance Spanning

Published: 03/01/1993   |   DOI: 10.1111/j.1540-6261.1993.tb04704.x

WAYNE E. FERSON, STEPHEN R. FOERSTER, DONALD B. KEIM

The methods of Gibbons and Ferson (1985) are extended, relaxing the assumption that expected returns are linear functions of predetermined instruments. A model of conditional mean‐variance spanning generalizes Huberman and Kandel (1987). The empirical results indicate that more than a single risk premium is needed to model expected stock and bond returns, but the number of common factors in the expected returns is small. However, when size‐based common stock portfolios proxy for the risk factors, we reject the hypothesis that four of them describe the conditional expected returns of the other assets.