A stochastic discount factor for asset returns is recovered from equilibrium marginal rates of tr... more A stochastic discount factor for asset returns is recovered from equilibrium marginal rates of transformation inferred from producers' first-order conditions. The marginal rate of transformation implies a novel macro-factor asset pricing model that does a reasonable job explaining the cross-sectional variation in average stock returns with plausible parameter values.
Abstract The standard dynamic investment model fails to explain the value spread, which is the di... more Abstract The standard dynamic investment model fails to explain the value spread, which is the difference in the market equity-to-capital ratio between extreme book-to-market deciles. Even when the model manages to fit the valuation ratios across some testing assets, the implied expected return errors are large. In contrast to the model's superior in-sample fit of expected returns, recursive estimation reveals its poor out-of-sample performance.
Abstract: We show that firms with lower labor hiring and investment rates have on average higher ... more Abstract: We show that firms with lower labor hiring and investment rates have on average higher future stock returns in the cross-section of US publicly traded firms. The predictability holds even after controlling for other known stock return predictors, varies across firms' technologies and exhibits a clear trend over time. We propose a production-based asset pricing model with adjustment costs in both labor and capital inputs to explain the empirical findings. Labor adjustment costs make hiring decisions forward looking.
Many leading asset pricing models predict that the term structures of expected returns and volati... more Many leading asset pricing models predict that the term structures of expected returns and volatilities on dividend strips are strongly upward sloping. Yet the empirical evidence suggests otherwise. This discrepancy can be reconciled if these models replace their exogenously specified dividend dynamics with processes that are derived endogenously from capital structure policies that generate stationary leverage ratios.
Define the vector of state variables as xit-1=(Kit-1, ϵit-1, Pit-1, Zit-1), where Kit-1 is the cu... more Define the vector of state variables as xit-1=(Kit-1, ϵit-1, Pit-1, Zit-1), where Kit-1 is the current period stock of capital, ϵit-1 is the current period productivity level and Pit-1= pit-1/pjt-1 is the current period relative price of good i with respect to the price of the numeraire good j, which wlog is specified to be the good from technology 1, and so P1t-1≡ 1.
The major purpose of this study is to analyse the cyclical developments of the Portuguese economy... more The major purpose of this study is to analyse the cyclical developments of the Portuguese economy in the 1910-1958 period. This study was motivated by the release of National Account estimates for the above period in Batista et al.(1997). Previous studies on the behaviour of economic cycles either did not cover this period, as in Dias (1997), or used different series, as in Correia et al.(1992a) and Neves (1994).
Abstract We introduce labor adjustment costs in the q-theory model of expected returns and test t... more Abstract We introduce labor adjustment costs in the q-theory model of expected returns and test the labor-augmented model using moments of the cross-section of expected stock returns as well as stock valuation ratios. Adding labor substantially reduces the pricing errors of the baseline q-theory model across portfolios sorted on investment-to-assets, book-to-market, asset growth, and labor hiring.
Abstract Using a novel measure of industry exposure to government spending, we show predictable v... more Abstract Using a novel measure of industry exposure to government spending, we show predictable variation in cash flows and stock returns over political cycles. During Democratic presidencies, firms with high government exposure experience higher cash flows and stock returns, while the opposite pattern holds true during Republican presidencies. Business cycles, firm characteristics, and standard risk factors do not account for the pattern in returns across presidencies.
Abstract Previous studies show that firms with low inventory growth outperform firms with high in... more Abstract Previous studies show that firms with low inventory growth outperform firms with high inventory growth in the cross-section of publicly traded firms. In addition, inventory investment is volatile and procyclical, and inventory-to-sales is persistent and countercyclical. We embed an inventory holding motive into the investment-based asset pricing framework by modeling inventory as a factor of production with convex and nonconvex adjustment costs.
Abstract What explains the cross-sectional variation of equity valuation ratios? The q-theory of ... more Abstract What explains the cross-sectional variation of equity valuation ratios? The q-theory of investment implies that equity-to-capital equals marginal cost of investment minus debt-to-capital as well as the present value of marginal benefit of investment minus debt-to-capital. We estimate the two valuation equations using generalized methods of moments at the portfolio level.
Abstract In the context of a single currency and a common monetary policy defined by the European... more Abstract In the context of a single currency and a common monetary policy defined by the European Central Bank for the euro area as a whole, it is important to evaluate the degree of business cycle resemblance among the participant countries. We resort to the association and synchronization concepts to define cyclical convergence.
Abstract This paper explores the implications of the producers' first order conditions for asset ... more Abstract This paper explores the implications of the producers' first order conditions for asset pricing and provides an explanation of the cross-sectional variation in average stock returns. Theoretically, I derive a stochastic discount factor for asset returns from the equilibrium marginal rate of transformation, the rate at which a producer can transform output in one state of nature into output in another state.
Este estudo tem como principal objectivo analisar a evolução cíclica da economia portuguesa no pe... more Este estudo tem como principal objectivo analisar a evolução cíclica da economia portuguesa no período de 1910 a 1958. A realização deste estudo foi motivada pela divulgação de estimativas de Contas Nacionais para o referido período em Batista e outros (1997). É de referir que anteriores estudos sobre o comportamento dos ciclos económicos em Portugal ou não cobriam este período, como é o caso de Dias (1997), ou utilizavam séries diferentes, como Correia e outros (1992a) e Neves (1994).
Abstract: High rates of government investment in public sector capital (eg, highways) forecast hi... more Abstract: High rates of government investment in public sector capital (eg, highways) forecast high risk premiums both at the aggregate and firm level. This result is in sharp contrast with the well-documented negative relationship between the private sector investment rate and risk premiums, and is robust to the inclusion of other business cycle and fiscal policy variables. To explain the empirical findings, we introduce public sector physical capital into the neoclassical q-theory model of investment.
O grau de semelhança dos ciclos económicos ea existência de assimetrias cíclicas constituem eleme... more O grau de semelhança dos ciclos económicos ea existência de assimetrias cíclicas constituem elementos centrais no actual debate sobre uniões monetárias. Este artigo pretende contribuir para este debate, fornecendo uma análise descritiva da evolução cíclica do produto dos países da União Europeia entre 1960 e 1999. Não se pretende fornecer uma previsão relativamente à evolução futura, uma vez que a criação da União Monetária representa provavelmente uma alteração de regime (1).
Abstract In the cross-section of US publicly traded firms there is a large inventory growth risk ... more Abstract In the cross-section of US publicly traded firms there is a large inventory growth risk premium. We document that the spread in expected returns between firms with high versus low inventory growth rates is as high as 7% per annum, after controlling for differences across the firm's capital investment rate. We investigate the ability of two leading macroeconomic models of inventory behavior to simultaneously match the cross-sectional properties of asset prices and real quantities in the data.
Abstract We provide a theoretical and empirical analysis of the link between advertising expendit... more Abstract We provide a theoretical and empirical analysis of the link between advertising expenditures, brand capital, and asset returns in the cross-section of US publicly traded firms. Interpreting advertising expenditures as firms' investment in brand capital, we document that:(i) firms with high brand capital investment rates underperform firms with low brand capital investment rates by 7% per annum; and (ii) brand capital intensive firms outperform low brand capital intensive firms by 4.1% per annum.
Abstract Yes, but only for public investment in the non-defense sector. We introduce public secto... more Abstract Yes, but only for public investment in the non-defense sector. We introduce public sector physical capital (eg highways) into the q-theory model of stock returns and test its implications for stock market return predictability in the US economy. If public capital increases the productivity of private inputs, high rates of investment in public capital forecast high future stock returns.
Public and private sector real growth rate of investment. The variable∆ I is the real growth rate... more Public and private sector real growth rate of investment. The variable∆ I is the real growth rate in total nonresidential private investment, which is computed as∆ It= log (It)− log (It-1). The variable∆ GIt is the real growth rate of public sector investment, which is computed as∆ GIt= log (GIt)− log (GIt-1). Since these growth variables do not depend on the construction of the capital stock, they can be used to check the robustness of the findings. Risk premium proxies.
2. Report equal-weighted portfolio returns of the ten one-way sorted on hiring and nine two-way s... more 2. Report equal-weighted portfolio returns of the ten one-way sorted on hiring and nine two-way sorted on investment and hiring portfolios, across the full-sample, and across a sub-sample of firms that excludes micro cap firms. We show that the hiring return spread is stronger in equal-weighted returns.
A stochastic discount factor for asset returns is recovered from equilibrium marginal rates of tr... more A stochastic discount factor for asset returns is recovered from equilibrium marginal rates of transformation inferred from producers' first-order conditions. The marginal rate of transformation implies a novel macro-factor asset pricing model that does a reasonable job explaining the cross-sectional variation in average stock returns with plausible parameter values.
Abstract The standard dynamic investment model fails to explain the value spread, which is the di... more Abstract The standard dynamic investment model fails to explain the value spread, which is the difference in the market equity-to-capital ratio between extreme book-to-market deciles. Even when the model manages to fit the valuation ratios across some testing assets, the implied expected return errors are large. In contrast to the model's superior in-sample fit of expected returns, recursive estimation reveals its poor out-of-sample performance.
Abstract: We show that firms with lower labor hiring and investment rates have on average higher ... more Abstract: We show that firms with lower labor hiring and investment rates have on average higher future stock returns in the cross-section of US publicly traded firms. The predictability holds even after controlling for other known stock return predictors, varies across firms' technologies and exhibits a clear trend over time. We propose a production-based asset pricing model with adjustment costs in both labor and capital inputs to explain the empirical findings. Labor adjustment costs make hiring decisions forward looking.
Many leading asset pricing models predict that the term structures of expected returns and volati... more Many leading asset pricing models predict that the term structures of expected returns and volatilities on dividend strips are strongly upward sloping. Yet the empirical evidence suggests otherwise. This discrepancy can be reconciled if these models replace their exogenously specified dividend dynamics with processes that are derived endogenously from capital structure policies that generate stationary leverage ratios.
Define the vector of state variables as xit-1=(Kit-1, ϵit-1, Pit-1, Zit-1), where Kit-1 is the cu... more Define the vector of state variables as xit-1=(Kit-1, ϵit-1, Pit-1, Zit-1), where Kit-1 is the current period stock of capital, ϵit-1 is the current period productivity level and Pit-1= pit-1/pjt-1 is the current period relative price of good i with respect to the price of the numeraire good j, which wlog is specified to be the good from technology 1, and so P1t-1≡ 1.
The major purpose of this study is to analyse the cyclical developments of the Portuguese economy... more The major purpose of this study is to analyse the cyclical developments of the Portuguese economy in the 1910-1958 period. This study was motivated by the release of National Account estimates for the above period in Batista et al.(1997). Previous studies on the behaviour of economic cycles either did not cover this period, as in Dias (1997), or used different series, as in Correia et al.(1992a) and Neves (1994).
Abstract We introduce labor adjustment costs in the q-theory model of expected returns and test t... more Abstract We introduce labor adjustment costs in the q-theory model of expected returns and test the labor-augmented model using moments of the cross-section of expected stock returns as well as stock valuation ratios. Adding labor substantially reduces the pricing errors of the baseline q-theory model across portfolios sorted on investment-to-assets, book-to-market, asset growth, and labor hiring.
Abstract Using a novel measure of industry exposure to government spending, we show predictable v... more Abstract Using a novel measure of industry exposure to government spending, we show predictable variation in cash flows and stock returns over political cycles. During Democratic presidencies, firms with high government exposure experience higher cash flows and stock returns, while the opposite pattern holds true during Republican presidencies. Business cycles, firm characteristics, and standard risk factors do not account for the pattern in returns across presidencies.
Abstract Previous studies show that firms with low inventory growth outperform firms with high in... more Abstract Previous studies show that firms with low inventory growth outperform firms with high inventory growth in the cross-section of publicly traded firms. In addition, inventory investment is volatile and procyclical, and inventory-to-sales is persistent and countercyclical. We embed an inventory holding motive into the investment-based asset pricing framework by modeling inventory as a factor of production with convex and nonconvex adjustment costs.
Abstract What explains the cross-sectional variation of equity valuation ratios? The q-theory of ... more Abstract What explains the cross-sectional variation of equity valuation ratios? The q-theory of investment implies that equity-to-capital equals marginal cost of investment minus debt-to-capital as well as the present value of marginal benefit of investment minus debt-to-capital. We estimate the two valuation equations using generalized methods of moments at the portfolio level.
Abstract In the context of a single currency and a common monetary policy defined by the European... more Abstract In the context of a single currency and a common monetary policy defined by the European Central Bank for the euro area as a whole, it is important to evaluate the degree of business cycle resemblance among the participant countries. We resort to the association and synchronization concepts to define cyclical convergence.
Abstract This paper explores the implications of the producers' first order conditions for asset ... more Abstract This paper explores the implications of the producers' first order conditions for asset pricing and provides an explanation of the cross-sectional variation in average stock returns. Theoretically, I derive a stochastic discount factor for asset returns from the equilibrium marginal rate of transformation, the rate at which a producer can transform output in one state of nature into output in another state.
Este estudo tem como principal objectivo analisar a evolução cíclica da economia portuguesa no pe... more Este estudo tem como principal objectivo analisar a evolução cíclica da economia portuguesa no período de 1910 a 1958. A realização deste estudo foi motivada pela divulgação de estimativas de Contas Nacionais para o referido período em Batista e outros (1997). É de referir que anteriores estudos sobre o comportamento dos ciclos económicos em Portugal ou não cobriam este período, como é o caso de Dias (1997), ou utilizavam séries diferentes, como Correia e outros (1992a) e Neves (1994).
Abstract: High rates of government investment in public sector capital (eg, highways) forecast hi... more Abstract: High rates of government investment in public sector capital (eg, highways) forecast high risk premiums both at the aggregate and firm level. This result is in sharp contrast with the well-documented negative relationship between the private sector investment rate and risk premiums, and is robust to the inclusion of other business cycle and fiscal policy variables. To explain the empirical findings, we introduce public sector physical capital into the neoclassical q-theory model of investment.
O grau de semelhança dos ciclos económicos ea existência de assimetrias cíclicas constituem eleme... more O grau de semelhança dos ciclos económicos ea existência de assimetrias cíclicas constituem elementos centrais no actual debate sobre uniões monetárias. Este artigo pretende contribuir para este debate, fornecendo uma análise descritiva da evolução cíclica do produto dos países da União Europeia entre 1960 e 1999. Não se pretende fornecer uma previsão relativamente à evolução futura, uma vez que a criação da União Monetária representa provavelmente uma alteração de regime (1).
Abstract In the cross-section of US publicly traded firms there is a large inventory growth risk ... more Abstract In the cross-section of US publicly traded firms there is a large inventory growth risk premium. We document that the spread in expected returns between firms with high versus low inventory growth rates is as high as 7% per annum, after controlling for differences across the firm's capital investment rate. We investigate the ability of two leading macroeconomic models of inventory behavior to simultaneously match the cross-sectional properties of asset prices and real quantities in the data.
Abstract We provide a theoretical and empirical analysis of the link between advertising expendit... more Abstract We provide a theoretical and empirical analysis of the link between advertising expenditures, brand capital, and asset returns in the cross-section of US publicly traded firms. Interpreting advertising expenditures as firms' investment in brand capital, we document that:(i) firms with high brand capital investment rates underperform firms with low brand capital investment rates by 7% per annum; and (ii) brand capital intensive firms outperform low brand capital intensive firms by 4.1% per annum.
Abstract Yes, but only for public investment in the non-defense sector. We introduce public secto... more Abstract Yes, but only for public investment in the non-defense sector. We introduce public sector physical capital (eg highways) into the q-theory model of stock returns and test its implications for stock market return predictability in the US economy. If public capital increases the productivity of private inputs, high rates of investment in public capital forecast high future stock returns.
Public and private sector real growth rate of investment. The variable∆ I is the real growth rate... more Public and private sector real growth rate of investment. The variable∆ I is the real growth rate in total nonresidential private investment, which is computed as∆ It= log (It)− log (It-1). The variable∆ GIt is the real growth rate of public sector investment, which is computed as∆ GIt= log (GIt)− log (GIt-1). Since these growth variables do not depend on the construction of the capital stock, they can be used to check the robustness of the findings. Risk premium proxies.
2. Report equal-weighted portfolio returns of the ten one-way sorted on hiring and nine two-way s... more 2. Report equal-weighted portfolio returns of the ten one-way sorted on hiring and nine two-way sorted on investment and hiring portfolios, across the full-sample, and across a sub-sample of firms that excludes micro cap firms. We show that the hiring return spread is stronger in equal-weighted returns.
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Papers by Frederico Belo