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To authenticate to the full-text of this article, please visit this link: http://dx.doi.org/10.1111/j.1468-5957.2009.02134.x Byline: Edward R. Lawrence (1), John Geppert (1), Arun J. Prakash (1) Keywords: Campbell Cochrane habit utility model; Hansen Jagannathan bounds; Burnside test; stochastic discount factor; external habit utility Abstract: Abstract: This paper tests whether the Campbell and Cochrane (1999) habit utility model generates a valid stochastic discount factor for the 25 Fama-French size/book-to-market and size/momentum sorted portfolios. Campbell and Cochrane (1999) derive a consumption based habit utility asset pricing model and calibrate it to aggregate US stock market data. However, they do not test whether their model is consistent with a larger cross section of asset returns. We test their model using the methodology of Hansen and Jagannathan (1991) and Burnside (1994). In contrast to previous studies, we find that for reasonable parameter values, the model's stochastic discount factor is inside the Hansen-Jagannathan bounds and therefore satisfies the necessary conditions for a valid stochastic discount factor. We trace the difference between our results and previous studies to the method used to estimate the model's parameters and the parameter values themselves. Author Affiliation: (1)The first and third authors are from Florida International University, Miami. The second author is from the University of Nebraska-Lincoln, NE. They would like to thank Martin Walker (editor) and an anonymous referee for their useful comments and suggestions. Article History: (Paper received May 2007, revised version accepted January 2009) Article note: (*) Address for correspondence: Arun J. Prakash, RB 206A, Department of Finance, College of Business Administration, Florida International University, Miami FL 33199, USA., e-mail: prakasha@fiu.edu

To purchase or authenticate to the full-text of this article, please visit this link: http://dx.doi.org/10.1111/j.1475-6803.2007.00219.x Byline: Duong Nguyen (1), Suchismita Mishra (2), Arun Prakash (2), Dilip K. Ghosh (3) Keywords: G12 Abstract: Abstract We examine whether the use of the three-moment capital asset pricing model can account for liquidity risk. We also make a comparative analysis of a four-factor model based on Fama-French and Pastor-Stambaugh factors versus a model based solely on stock characteristics. Our findings suggest that neither of the models captures the liquidity premium nor do stock characteristics serve as proxies for liquidity. We also find that sensitivities of stock return to fluctuations in market liquidity do not subsume the effect of characteristic liquidity. Furthermore, our empirical findings are robust to differences in market microstructure or trading protocols between NYSE/AMEX and NASDAQ. Author Affiliation: (1)University of Massachusetts, Dartmouth (2)Florida International University (3)Institute of Policy Analysis

A recent empirical study (Prakash, Moncarz, and deBoyrie. 2002) found that neither the rates of return probability distribution of the market index nor the individual stocks traded in the Latin American capital markets conform to the Gaussian (standard univariate normal) distributions. Hence, the pricing of assets in these markets may be better modeled through the Kraus and Litzenberger (1976) three-moment capital asset pricing model (CA PM) than through Sharpe's two-moment CA PM. If that is the case, the underlying return generating process will be the quadratic characteristic line model for the three-moment CAPM rather than the linear characteristic line model of the two-moment CAPM. This paper examines the stability of the parameters of these two alternative characteristic line models (which proxy for measures of market risk) over three non-overlapping regimes during the period examined. The study finds that, in general. these parameters are stable for individual stocks over our chosen sample period., Introduction This paper tests the stability of the parameters of the linear characteristic line (market) model of Sharpe (1964) and the quadratic characteristic line model of Kraus and Litzenberger (1976). [...]

The assumptions made by Ira Horowitz regarding the tendency of risk-preferring individuals to engage in gambles are refutable since they violate the Lemma 4 of the original research. The work, made by Prakash, Chang, Hamid and Smyser, strictly considers conditions wherein utility functions are characterized by risk aversion and skewness preferences. This restriction implies that solutions may only be generated from specific utility functions for a given level of wealth.

The relationship between deposit insurance and bank deposit rates in a long-run equilibrium state and a very general premium structure is investigated. A price discrimination model similar to that of Lott and Roberts showed that competition between banks would establish a relationship between insured and uninsured deposit rates with the size of the insurance premium. Also, analysis of the time series characteristics of insured and uninsured interest rates revealed that these rates, including deposit insurance premiums, are cointegrated series.

Risk-averse managers who demonstrate a preference for positive skewness may enter into high risk projects that appear to be unfair gambles if the payoffs exhibit a skewed distribution. This concept appears to be contrary but is actually consistent with utility theory. Moreover, since such individuals require a lower minimum return, they are more prone to accept high-risk projects than managers who do not have a preference for positive skewness.

A new method of modeling the intertemporal price behavior of zero-coupon pure discount bonds in the return distributions of these securities is introduced. The log-normal model of the return distribution, called the bounded distribution model (BDM), includes the arbitrage free bounds on the range of the return distribution. Using Treasury Bill data, the BDM is found to be superior to an unbounded distribution model since it meets the general conditions of the log-normal distribution and demonstrates relatively stable parameter estimates over time.

An entrepreneurial wealth-maximizing model of initial public offering (IPO) pricing is presented. The model indicates that personal tax rates on ordinary income and capital gains can influence the degree of underpricing of each IPO issue. The model predicts that a rise in the capital gains tax rate should result in a lower degree of underpricing. This tax-based underpricing hypothesis is tested on the Tax Reform Act of 1986.

Using Sharpe and Treynor's two moment and Prakash and Bear's and Stephens and Proffitt's higher moment performance measures, this paper presents empirical evidence that various measures provide vastly different performance rankings of 14 international stock markets, albeit in the same direction. The choice of different investment horizons (i.e., the intervaling) also affects these rankings., INTRODUCTION There is ample empirical evidence (Bailey and Stulz, 1990; Cumby and Glen, 1990; etc.) that internationally diversified portfolios provide a greater degree of diversification in comparison to domestically diversified [...]

Theoretical and empirical evidence has been established for the positive relation of the growth rate to a firm's relative systematic risk. The rate is measured either as net or operating income. An increase in the debt-to-asset ratio diminishes the rate's relationship with the beta factor. Although increased debt will raise the firm's market risk, net income growth will be affected by increased debt service charges.

Stock price movements in multimarket scenarios give investors additional data about the risk involved in those shares. The multimarket settings are typified by common stocks being traded on several markets both domestically and internationally. A simple procedure is presented to get the best linear unbiased estimator of relevant systematic risk of a stock. The procedure can integrate all the market data available at any specific timeframe.

A study was conducted to evaluate possible explanations for underpricing initial public offerings (IPOs). Empirical evidence is presented on hypotheses which support underpricing. A model is developed which analyzes the effect of personal taxes and entrepreneurial ownership on the pricing issue. Results indicate that IPOs can be underpriced under some level of ownership and personal tax conditions.