Abstracts of Scholarly Research

Working Paper Series: Capital Market Pricing

Critical Comments Welcomed

A working paper is any academic journal-length manuscript that may or may not have been submitted for publication but has not been accepted for print publication.

To translate these pages from English to your language, go local.

Working Paper No. 1

FEN Reference: JFA:C-WPS98-116
Title: Critique of Asset Pricing Circularity
Date: First Submitted on 13 June 1995

Abstract: This theoretical paper explores the nature of asset pricing models which have explanatory variables that are not independent of the variable to be explained. Such logically circular asset pricing models reduce to either economically-meaningless tautologies and or scientifically-invalid market-generated autoregressions, a.k.a. market timing. The tautology and timing implications of circular models need to be made explicit. So-called firm "size" (market value of equity) and so-called "value" (book-to-market value ratio) are two of the best known variables that are circular in models that seek to explain total return. Circular models are based on intellectual speculation and not on fact. Theoretical, methodological, empirical and clinical arguments support this conclusion.

Status: The referee and editors at an academic journal found the content to be "very interesting", and no challenge of the content was sustained after immediate rebuttal by the author. Nevertheless, their criticisms of the style of the paper are useful. Therefore, qualified readers are invited to offer comments and suggestions about both the content and the style.

Reminder: The stock market pricing process which is investigated in this paper has absolutely nothing to do with the intrinsic economic valuation process for companies which is totally independent of the stock market.

Working Paper No. 2

FEN Reference: JFA:C-WPS98-107
Title: The R&D Effect with Static Stock Pricing
Date: First Submitted on 6 July 1995

Abstract: This empirical paper presents a static analysis of the impact of corporate research and development (R&D) on the market pricing of common stock. R&D sales intensity is reflected in the beta coefficients of Sharpe's "diagonal" CAPM. This and eight other measures of corporate R&D activity each partly explains the cross-section of expected excess real total returns. Persistent anomalous pricing of risk factors as indicated by significant market premia, all of which are negative, is robust across R&D measures, industry research group code, sales revenue, market data lead times, market proxies, firm R&D disaggregation, the January seasonal, and model estimation methods. For portfolios formed on annual R&D expense, the average returns of firms reporting exclusively proprietary R&D are higher than those of firms reporting R&D that includes contract R&D and or engineering. The exclusion of returns for January augments rather than attenuates the pricing of portfolios formed on R&D expense.

Status: The referees and editor at an academic journal did not sustain their criticisms of the content after immediate rebuttal of each and every point by the author. Their points were either immaterial, irrelevant, or wrong, as shown by cited publications, usually an academic journal article. Nevertheless, their criticisms of the style and length are useful. Thus, qualified readers are invited to offer comments and suggestions about both the content and the style. Furthermore, any serious scholar who volunteers to help in the rewriting of this paper will be given access to the data and program files and the documentation. This research meets high scholarly standards. It is thorough, rigorous, systematic, and scientifically valid. There are no fallacious circular risk factors. There are no inexplicable seasonal risk factors. There is no data snooping.

Reminder: The stock market pricing process which is investigated in this paper has absolutely nothing to do with the intrinsic economic valuation process for companies which is totally independent of the stock market.

Working Paper No. 3

FEN Reference: JFA:C-WPS98-108
Title: The R&D Effect with Dynamic Stock Pricing
Date: First Submitted on 29 August 1995

Abstract: This empirical paper presents a dynamic analysis of the impact of corporate research and development (R&D) on the market pricing of common stock. It is a sequel to the static analysis of the R&D effect that appears in a separate paper. The multivariate capital asset pricing model (CAPM) consisting of market beta in combination with R&D group, and separately in combination with firm "size" as measured by the natural logarithm of market value of equity, as risk factors results in persistent anomalous pricing as indicated by significant risk premia for R&D group, and separately for firm "size", when portfolios are formed monthly on firm-level R&D expense. Firm "size" is a logically circular explanatory variable when specified in any model designed to explain return, but it here serves merely to provide a benchmark model. Market beta is not priced jointly with either industry research group code or firm "size" in these tests. The univariate Sharpe's "diagonal" CAPM estimated with seemingly unrelated regression assuming a pure first-order autoregressive return-generative process shows evidence of no martingales with zero drift. All risk premia are negative. Based on the frequency of priced decile-rank portfolios, R&D group dominates firm-level R&D expense which in turn dominates firm "size".

Status: The referees and editor at an academic journal did not sustain their criticisms of the content after immediate rebuttal of each and every point by the author. Their points were either immaterial, irrelevant, or wrong, as shown by cited publications, usually an academic journal article. Nevertheless, their criticisms of the style and length are useful. Thus, qualified readers are invited to offer comments and suggestions about both the content and the style. Furthermore, any serious scholar who volunteers to help in the rewriting of this paper will be given access to the data and program files and the documentation. This research meets high scholarly standards. It is thorough, rigorous, systematic, and scientifically valid. There are no fallacious circular risk factors. There are no inexplicable seasonal risk factors. There is no data snooping.

Reminder: The stock market pricing process which is investigated in this paper has absolutely nothing to do with the intrinsic economic valuation process for companies which is totally independent of the stock market.

Copyright © 1996-2003. Numeraire.com. All rights reserved.