PABLO FERNANDEZ, University of Navarra - IESE Business School
Email: fernandezpa@iese.edu
HEINRICH LIECHTENSTEIN, University of Navarra - IESE Business School
Email: hl@iese.edu

Mehra and Prescott (1985) argued that, according to sensible asset pricing models, stocks should provide at most a 0.35% premium over bills. However, companies use higher equity premia (average around 6%) for evaluating their investment projects, professors use in class and in their textbooks higher equity premia (average around 6%, range from 3 to 10%) and investors use higher equity premia for valuing companies. The overall result is that equity prices are, on average, undervalued (and have been undervalued in the last decades) and, consequently, the measured ex-post equity premium (HEP) is also high.

If the additional returns beyond the risk-free rate demanded by equity investors (ex-ante risk premia) and used in financial asset pricing models have been high, it is not a surprise that the ex-post risk premia (calculated with historical data) have been also high. If most investors use historical data to estimate the required and the expected equity premium, the undervaluation and the high ex-post risk premium are self fulfilling prophecies.

YACINE AIT-SAHALIA, Princeton University - Department of Economics, National Bureau of Economic Research (NBER)
Email: yacine@princeton.edu
ROBERT L. KIMMEL, Ohio State University - Department of Finance
Email: kimmel_42@cob.osu.edu

We develop and implement a technique for maximum likelihood estimation in closed-form of multivariate affine yield models of the term structure of interest rates. We derive closed-form approximations to the likelihood functions for all nine of the Dai and Singleton (2000) canonical affine models with one, two, or three underlying factors. Monte Carlo simulations reveal that this technique very accurately approximates true maximum likelihood, which is, in general, infeasible for affine models. We also apply the method to a dataset consisting of synthetic US Treasury strips, and find parameter estimates for nine different affine yield models, each using two different market price of risk specifications. One advantage of maximum likelihood estimation is the ability to compare non-nested models using likelihood ratio tests. We find, using these tests, that the choice of preferred canonical model depends on the market price of risk specification. Comparison to other approximation methods, Euler and QML, on both simulated and real data suggest that our approximation technique is much closer to true MLE than alternative methods.

JOSEP MARIA PUIGVERT GUTIERREZ, European Central Bank
Email: josep_maria.puigvert@ecb.int
JOSEP FORTIANA GREGORI, University of Barcelona
Email: fortiana@ub.edu

In this study we combine clustering techniques with a moving window algorithm in order to filter financial market data outliers. We apply the algorithm to a set of financial market data which consists of 25 series selected from a larger dataset using a cluster analysis technique taking into account the daily behaviour of the market; each of these series is an element of a cluster that represents a different segment of the market. We set up a framework of possible algorithm parameter combinations that detect most of the outliers by market segment. In addition, the algorithm parameters that have been found can also be used to detect outliers in other series with similar economic behaviour in the same cluster. Moreover, the crosschecking of the behaviour of different series within each cluster reduces the possibility of observations being misclassified as outliers.

URS VON ARX, Swiss Federal Institute of Technology Zurich
Email: uvonarx@ethz.ch
ANDREAS ZIEGLER, Swiss Federal Institute of Technology Zurich - Department of Management, Technology, and Economics (D-MTEC), University of Zurich
Email: andziegler@ethz.ch

This paper provides new empirical evidence for the effect of corporate social responsibility (CSR) on corporate financial performance. In contrast to former studies, we examine two different regions, namely the USA and Europe. Our econometric analysis shows that environmental and social activities of a firm compared with other firms within the industry are valued by financial markets in both regions. However, the respective positive effects on average monthly stock returns between 2003 and 2006 appear to be more robust in the USA and, in addition, to be nonlinear. Our analysis furthermore points to biased parameter estimations if incorrectly specified econometric models are applied: The seemingly significantly negative effect of environmental and social performance of the industry to which a firm belongs vanishes if the explanation of stock performance is based on the Fama-French threefactor or the Carhart four-factor models instead of the simple Capital Asset Pricing Model.

ANDREA RONCORONI, ESSEC Business School
Email: roncoroni@essec.fr

We review major frameworks for modelling commodity prices.

CHRISTIAN-OLIVER EWALD, University of St. Andrews - School of Economics and Finance
Email: ce16@st-andrews.ac.uk
WEN-KAI WANG, University of St. Andrews - School of Economics and Finance
Email: ww83@st-andrews.ac.uk

We consider a model of a fishery in which the dynamic of the unharvested fish population is given by the stochastic logistic growth equation. Similar as in the classical deterministic analogon, we assume that the fishery harvests the fish population following a constant effort strategy. In a first step we derive the effort level that leads to maximum expected sustainable yield, which is understood as the expectation of the equilibrium distribution of the stochastic dynamics. This replaces the non-zero fixed point, in the classical deterministic setup. In a second step, we assume that the fishery is risk averse and that there is a trade off between expected sustainable yield and uncertainty measured in terms of the variance of the equilibrium distribution. We derive the optimal constant effort harvesting strategy for this problem. In a final step, we consider an approach which we call the mean-variance analysis to sustainable fisheries. Similar as in the now classical mean-variance analysis in Finance, going back to Markowitz (1957), we study the problem of maximizing expected sustainable yields under variance constraints, and dual to this, minimizing the variance, e.g. risk, under guaranteed minimum expected sustainable yields. We derive explicit formulas for the optimal fishing effort in all four problem considered and study the effects of uncertainty, risk aversion and mean reversion speed on fishing efforts.

NIKLAS WAGNER, University of Passau
Email: niklas.wagner@uni-passau.de
ELISABETH STOCKER, University of Passau
Email: elisabeth.stocker@uni-passau.de

In this paper we propose a new family of European style indices (ESI). While our indices nest the well-known Fama and French (1992) and Carhart (1997) equity styles, they include two additional styles, namely idiosyncratic risk as well as illiquidity. We emphasize the importance of those additional equity styles by pointing out results of the recent empirical literature. We then define six major equity style indices, which include beta, size, valuation, momentum, idiosyncratic risk and illiquidity. The style index results are presented for the European equity market using the Dow Jones Stoxx 600 universe.

CHOKRI MAMOGHLI, Institut Supérieur de Gestion
Email: mamoghli@yahoo.fr
SAMI DABOUSSI, University of Tunis - Faculty of Law, Economics and Management of Jendouba
Email: daboussi_sami@yahoo.fr

We showed that traditional performance measures are not adequate for the performance evaluation of hedge funds portfolios because they take into account neither the asymmetry of returns nor the risk perception of investors. In order to overcome this problem, we made recourse to performance measures in the downside risk framework. By using the Credit Suisse/Tremont Hedge Fund database, we showed that Sortino ratio; upside potential ratio and Omega measure make it possible to overcome the drawbacks of Sharpe ratio. The results obtained also showed that the index of Mamoghli and Daboussi is the adequate measure which makes it possible to surmount the drawbacks of Treynor index and Mishra and Rahman index. Likewise, the results proved that alpha of Mamoghli and Daboussi measures more correctly than Jensen alpha and Mishra and Rahman alpha the performance of hedge funds.