The Journal of Finance

The Implications of Nonmarketable Income for Consumption‐Based Models of Asset Pricing

Published: 09/01/1988   |   DOI: 10.1111/j.1540-6261.1988.tb02609.x

DAVID P. BROWN

A new representation of nonmarketable (NM) income is introduced in this essay. Using this representation and continuous trading, there exists a set of individuals who do not participate in the asset market and who consume at the rate of nonmarketable income derived from human capital. Because these individuals remain nonparticipants for a range of stochastic processes governing the NM income, consumption betas are not generally unique in value and the consumption‐based CAPM (CCAPM) does not obtain. However, the intertemporal CAPM (ICAPM) of Merton remains valid.

Mutual Fund Flows and Cross‐Fund Learning within Families

Published: 03/05/2015   |   DOI: 10.1111/jofi.12263

DAVID P. BROWN, YOUCHANG WU

We develop a model of performance evaluation and fund flows for mutual funds in a family. Family performance has two effects on a member fund's estimated skill and inflows: a positive common‐skill effect, and a negative correlated‐noise effect. The overall spillover can be either positive or negative, depending on the weight of common skill and correlation of noise in returns. Its absolute value increases with family size, and declines over time. The sensitivity of flows to a fund's own performance is affected accordingly. Empirical estimates of fund flow sensitivities show patterns consistent with rational cross‐fund learning within families.

A Simple Econometric Approach for Utility‐Based Asset Pricing Models

Published: 06/01/1985   |   DOI: 10.1111/j.1540-6261.1985.tb04962.x

DAVID P. BROWN, MICHAEL R. GIBBONS

Utility‐based models of asset pricing may be estimated with or without assuming a distribution for security returns; both approaches are developed and compared here. The chief strength of a parametric estimator lies in its computational simplicity and statistical efficiency when the added distributional assumption is true. In contrast, the nonparametric estimator is robust to departures from any particular distribution, and it is more consistent with the spirit underlying utility‐based asset pricing models since the distribution of asset returns remains unspecified even in the empirical work. The nonparametric approach turns out to be easy to implement with precision nearly indistinguishable from its parametric counterpart in this particular application. The application shows that log utility is consistent with the data over the period 1926–1981.

Market Orders and Market Efficiency

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb03816.x

DAVID P. BROWN, ZHI MING ZHANG

This work compares a dealer market and a limit‐order book. Dealers commonly observe order flow and collect information from multiple market orders. They may be better informed than other traders, although they do not earn rents from this information. Dealers earn rents as suppliers of liquidity, and their decisions to enter or exit the market are independent of the degree of adverse selection. Introduction of a limit‐order book lowers the execution‐price risk faced by speculators and leads them to trade more aggressively on their information. Introduction of the book also lowers dealer profits, but increases the informational efficiency of prices.