The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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A Mean‐Variance Benchmark for Intertemporal Portfolio Theory
Published: 09/17/2013 | DOI: 10.1111/jofi.12099
JOHN H. COCHRANE
Mean‐variance portfolio theory can apply to streams of payoffs such as dividends following an initial investment. This description is useful when returns are not independent over time and investors have nonmarketed income. Investors hedge their outside income streams. Then, their optimal payoff is split between an indexed perpetuity—the risk‐free payoff—and a long‐run mean‐variance efficient payoff. “Long‐run” moments sum over time as well as states of nature. In equilibrium, long‐run expected returns vary with long‐run market betas and outside‐income betas. State‐variable hedges do not appear.
Presidential Address: Discount Rates
Published: 07/19/2011 | DOI: 10.1111/j.1540-6261.2011.01671.x
JOHN H. COCHRANE
Discount‐rate variation is the central organizing question of current asset‐pricing research. I survey facts, theories, and applications. Previously, we thought returns were unpredictable, with variation in price‐dividend ratios due to variation in expected cashflows. Now it seems all price‐dividend variation corresponds to discount‐rate variation. We also thought that the cross‐section of expected returns came from the CAPM. Now we have a zoo of new factors. I categorize discount‐rate theories based on central ingredients and data sources. Incorporating discount‐rate variation affects finance applications, including portfolio theory, accounting, cost of capital, capital structure, compensation, and macroeconomics.
Production‐Based Asset Pricing and the Link Between Stock Returns and Economic Fluctuations
Published: 03/01/1991 | DOI: 10.1111/j.1540-6261.1991.tb03750.x
JOHN H. COCHRANE
This paper describes a production‐based asset pricing model. It is analogous to the standard consumption‐based model, but it uses producers and production functions in the place of consumers and utility functions. The model ties stock returns to investment returns (marginal rates of transformation) which are inferred from investment data via a production function. The production‐based model is used to examine forecasts of stock returns by business‐cycle related variables and the association of stock returns with subsequent economic activity.
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.