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Lecture #22 - Ec 136 Financial Economics Lecture 22...

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Ec 136, Financial Economics Lecture 22 November 19
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Outline for today 1. CAPM anomalies 2. Factor models and APT 3. The Fama-French model www.econ.berkeley.edu/~szeidl/ec136/ec136index.htm Readings: BKM Chapter 9.1, 10.1-10.2, 11.1-11.5 (9.1-9.4, 10.1-10.5 in editions 7&8) Problem set 7 : due today.
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1. CAPM anomalies ° Value e°ect : Values stocks (high book-to-market) have high returns relative to CAPM prediction. ° Size e°ect : Small stocks (low market cap) have somewhat higher return relative to CAPM. ° Momentum : Momentum stocks (that have done well over past yr) earn high subsequent return relative to CAPM. ° Reversal : Stocks that have done well the past 3-5 years have low returns relative to CAPM. ° Possible interpretations: 1. A more general model of risk and return is needed 2. Markets are not e°cient.
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2. Factor models ° Suppose we run regressions for all assets i : R it ± R f = ° i + ± i ² ° R mt ± R f ± + " it but don’t make CAPM assumptions.
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