Alex Taylor’s research interests are in empirical asset pricing. His recent papers include:
What is the Consumption-CAPM missing? An Information-Theoretic Framework for the Analysis of Asset Pricing Model with A. Ghosh and C.Julliard. Accepted for publication in The Review of Financial Studies
Our information-theoretic framework also enables us to extract a non-parametric estimate of the unobservable component of the SDF. Empirically, we find it to have a business cycle pattern, and significant correlations with both financial market crashes unrelated to economy-wide contractions, and the Fama-French factors. We apply our methodology to some leading consumption-based models, gaining new insights about their empirical performance.
Expected Returns and Risk in the Stock Market with Michael J. Brennan
We present new evidence on the predictability of aggregate stock market returns by developing two new prediction models, one risk-based, and the other purely statistical. The pricing kernel model expresses the expected return as the covariance of the market return with a pricing kernel that is a linear function of portfolio returns. The discount rate model predicts returns directly as a function of weighted past portfolio returns. These models provide independent evidence of predictability, with R2 of 16-19% for 1-year returns. We show that innovations in the pricing kernel are associated with the cash flow component of the market return.