Wayne Ferson - Empirical Asset Pricing: Models and Methods

This book is designed for PhD students in finance or advanced masters students interested in empirical asset pricing and as a reference for researchers. The main goal is to help readers build and understand a tool kit for empirical asset pricing research. As asset pricing has matured as a field, it has developed more breadth. This is a long book, but it leaves out many advanced topics. The aim is to present the material at an advanced introductory level. I try to provide enough references that a scholar can use the book as a jumping-off point for a research program. The structure is motivated from my experience in teaching this material in doctoral programs at more than a half-dozen universities where I have served as a regular or visiting faculty member.

The book has four main sections. The first section of the book, parts IIII (chapters 114), covers the theory of empirical asset pricing. This section is structured around three central paradigms: mean variance analysis, stochastic discount factors, and beta pricing models. I describe a relation among the three paradigms, which I call triality. I develop the role of conditioning information in the implementation and interpretation of asset pricing tests. The second section of the book, part IV (chapters 1524), examines empirical methods. I start with the generalized method of moments, emphasizing how to implement the technique in various types of problems. There is a long chapter on panel regression methods and a chapter on bootstrapping for inferences about cross sections, where multiple comparisons must be considered. The third section consists of part V (chapters 2528) on fund performance evaluation and is perhaps the most comprehensive review of this important area that is currently available. Throughout the book, I combine classical foundations with more recent developments in the literature, and I relate some of the material to applications in investment management. The final section of the book, part VI (chapters 2934), presents selected applied topics on empirical asset pricing. These include a long chapter on predictability in asset markets, including predicting the levels of returns, volatility and higher moments, and predicting cross-sectional differences in returns. There are shorter chapters on production-based asset pricing, long-run risk models, the Campbell-Shiller approximation, the debate on covariances versus characteristics, and the relation of volatility to the cross section of stock returns.

I owe a debt of gratitude to many people who helped me in the writing of this book. Several years of doctoral students at the University of Southern California suffered through being guinea pigs for early drafts. I am grateful to Wayne Chang, Suk Won Lee, and Ben Zhang for comments. Allison Kays and Min Kim found many typos in early drafts. Min Kim went beyond the call of duty, finding not only typos but several instances where my arguments were unclear or had holes in them. Davidson Heath contributed Matlab code for the appendix. Cyd Westmoreland did some of the most impressive copyediting that I have ever seen. And my wife, Nancy Ferson, deserves credit for putting up with my incessant typing far into many evenings, as I pursued this obsession.