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Research Seminars & Workshops @ IRES


Professor K C John Wei
Hong Kong University of Science and Technology

A Model-Free CAPM with High Order Risks


Date:

30 Oct 2014 (Thu)

Time:

3.00 - 4.30pm

Venue:

RMI Executive Seminar Room 21 Heng Mui Keng Terrace, I3 Building, Level 4


Abstract

Allowing for non-normality in market returns, we present an approximate capital asset-pricing model in which besides first-order co-moment risks, higher-order co-moment risks are also important for pricing individual stocks. We find that the second-order risk is significantly and negatively priced and contributes to the inverse U-shaped relation between expected returns and betas. We then construct three risk factors with each to mimic second-order risk premiums. We show that each of our newly constructed second-order risk factors is related to the market variance risk premium. More importantly, a two-factor model consisted of a market factor and one of our second-order risk factors can fully explain the total (idiosyncratic) volatility puzzle and the MAX puzzle and partially explain the betting against beta premium.

About the Speaker

Professor Wei is currently Chair Professor of Finance and Director of Value Partners Center for Investing at HKUST. He received his BS from National Taiwan University of Science and Technology, MBA from National Chengchi University National, and PhD in Finance at the University of Illinois, Champaign-Urbana. He previously taught at University of Mississippi, University of Miami, and Indiana University. He previously served as Director of the Center for Asian Financial Markets and Director of Master of Science in Financial Analysis/Investment Management Programs at the HKUST for many years. Moreover, he assisted to develop wealth management and investment models for, among others, Hang Seng Bank Limited, The Hong Kong and Shanghai Banking Corporation Limited and Fidelity Investments Management (Hong Kong) Limited.

Professor Wei’s research interests are mainly in the areas of empirical asset pricing, international finance, and corporate governance. He has published more than fifty articles in leading finance and accounting journals including Journal of Finance, Journal of Financial Economics, Accounting Review, Management Science, Journal of Financial and Quantitative Analysis, Journal of Business, Financial Analysts Journal, Real Estate Economics, Journal of Financial Markets, Journal of Corporate Finance, Journal of Banking and Finance, and Journal of Empirical Finance, among other. He was also a column writer on Hong Kong stock market and warrant trading for Hong Kong Economic Journal for many years. Professor Wei is best known for his extensive research on the cross-sectional return predictability globally and in the U.S. His most influential contributions to the literature include the first findings on (1) “high investment, low returns,” (2) “high individualism, high momentum profits,” (3) “high forecasted earnings per share (FEPS), high returns,” and (4) “high growth in Year 2 FEPS, low returns.”

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