Dayong Huang

Date of Graduation


Document Type



My essays deal with macro factors and the cross sectional asset prices. It consists of 4 essays. My first essay consider asset pricing in a monetary economy where liquid assets are held to lower transaction costs. The ensuing model extends the CAPM and the Consumption CAPM by deriving real money growth as an additional factor determining returns and they compare favorably to other theoretical asset pricing models. The paper further introduces a technique that facilitates derivation of dynamic asset pricing results in discrete time by generalizing Stein's Lemma to multivariate cases. My second essay considers asset pricing from the production side. Relying on a general version of the traditional Real Business Cycle macro model we find that the variables determining the mean returns of all financial assets are the productivity shock as the sole factor together with the capital stock and productivity level as conditioning variables. The model explains the size premium from differences in the unconditional sensitivity to productivity shocks and explains the value premium from differences in the conditional sensitivity to productivity shocks. In my third essay we develop a measure previously considered by Kandel and Stambaugh (1995) to evaluate linear asset pricing models. The “KS-ratio” criterion rates a model's usefulness based on the mean portfolio return, for any given variance choice, obtained by a mean-variance decision maker using the model for optimal portfolio decisions. The KS-ratio together with the HJ-distance and several ad hoc evaluation criteria are applied to nine prominent asset pricing models. We find that it is necessary to correct for the number of factors and that this correction makes a substantial difference for model rankings. Cooper, Gutierrez and Hameed (2004) find that momentum profits derive from the “up” market; they claim that this is due to investor overconfidence. My fourth essay examines their proposition in an international context and finds qualified support: momentum profits exist only in the up market but this holds for only two of three market state classifications based on past returns. A further test using lagged world industrial production growth to classify market states largely supports the proposition.