Cochrane, John H. (John Howland) 1957Overview
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Most widely held works by
John H Cochrane
Asset pricing
by John H Cochrane
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25 editions published between 2001 and 2008 in English and Undetermined and held by 903 WorldCat member libraries worldwide "Written to be a summary for academics and professionals as well as a textbook, this book condenses and advances recent scholarship in financial economics. This revised edition corrects the original printing throughout, and updates and clarifies the treatment of a number of important topics."BOOK JACKET
Financial markets and the real economy
by John H Cochrane
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22 editions published between 2005 and 2006 in English and held by 410 WorldCat member libraries worldwide The author surveys work on the intersection between macroeconomics and finance. The challenge is to find the right measure of "bad times," rises in the marginal value of wealth, so that we can understand high average returns or low prices as compensation for assets' tendency to pay off poorly in "bad times." The author surveys the literature, covering the timeseries and crosssectional facts, the equity premium, consumptionbased models, general equilibrium models, and labor income/idiosyncratic risk approaches
Longterm debt and optimal policy in the fiscal theory of the price level
by John H Cochrane
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13 editions published in 1998 in English and held by 93 WorldCat member libraries worldwide Abstract: The fiscal theory says that the price level is determined by the ratio of nominal debt to the present value of real primary surpluses. I analyze longterm debt and optimal policy in the fiscal theory. I find that the maturity structure of the debt matters. For example, it determines whether news of future deficits implies current inflation or future inflation. When long term debt is present, the government can trade current inflation for future inflation by debt operations; this tradeoff is not present if the government rolls over short term debt. I solve for optimal debt policies to minimize the variance of inflation. I find cases in which longterm debt helps to stabilize inflation, and I find that the optimal inflationstabilizing policy produces time series that are surprisingly similar to U.S. surplus and debt time series
By force of habit : a consumptionbased explanation of aggregate stock market behavior
by John Y Campbell
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18 editions published between 1994 and 1998 in English and held by 93 WorldCat member libraries worldwide Abstract: We present a consumptionbased model that explains the procyclical variation of stock prices, the longhorizon predictability of excess stock returns, and the countercyclical variation of stock market volatility. Our model has an i.i.d. consumption growth driving process, and adds a slowmoving external habit to the standard power utility function. The latter feature produces cyclical variation in risk aversion, and hence in the prices of risky assets. Our model also predicts many of the difficulties that beset the standard power utility model, including Euler equation rejections, no correlation between mean consumption growth and interest rates, very high estimates of risk aversion, and pricing errors that are larger than those of the static CAPM. Our model captures much of the history of stock prices, given only consumption data. Since our model captures the equity premium, it implies that fluctuations have important welfare costs. Unlike many habitpersistence models, our model does not necessarily produce cyclical variation in the risk free interest rate, nor does it produce an extremely skewed distribution or negative realizations of the marginal rate of substitution
New facts in finance
by John H Cochrane
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11 editions published in 1999 in English and held by 89 WorldCat member libraries worldwide The last 15 years have seen a revolution in the way financial economists understand the world around us. We once thought that stock and bond returns were essentially unpredictable. Now we recognize that stock and bond returns have a substantial predictable component at long horizons. We once thought the capital asset pricing model (CAPM) provided a good description of why average returns on some stocks, portfolios, funds or strategies were higher than others. Now we recognize that the average returns of many investment opportunities cannot be explained by the CAPM, and multifactor models' have supplanted the CAPM to explain them. We once thought that longterm interest rates reflected expectations of future short term rates and that interest rate differentials across countries reflected expectations of exchangerate depreciation. Now, we see timevarying risk premia in bond and foreign exchange markets as well as in stock markets. Once, we thought that mutual fund average returns were well explained by the CAPM. Now, we recognize value'' and other high return strategies in funds, and slight persistence in fund performance. In this article, I survey these new facts. I show how they are related. Each case uses price variables to infer market expectations of future returns; each case notices that an offsetting adjustment (to dividends, interest rates, or exchange rates) seems to be absent or sluggish. Each case suggests that financial markets offer rewards in the form of average returns for holding risks related to recessions and financial distress, in addition to the risks represented by overall market movements
A frictionless view of U.S. inflation
by John H Cochrane
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14 editions published in 1998 in English and held by 88 WorldCat member libraries worldwide Abstract: Financial innovation challenges the foundations of monetary theory, and standard monetary theory has not been very successful at describing the history of U.S. inflation. Motivated by these observations, I ask: Can we understand the history of U.S. inflation using a framework that ignores monetary frictions? The fiscal theory of the price level allows us to think about price level determination with no monetary frictions. The price level adjusts to equilibrate the real value of nominal government debt with the present value of surpluses. I describe the theory, and I argue that it is a return to prequantity theoretic ideas in which money is valued via a commodity standard or because the government accepts it to pay taxes. Both sources of value are immune to financial innovation and the presence or absence of monetary frictions. I then interpret the history of U.S. inflation with a fiscaltheory, frictionless view. I show how the fiscal theory can accommodate the stylized fact that deficits and inflation seem to be negatively, not positively correlated. I verify its prediction that open market operations do not affect inflation. I show how debt policy has already smoothed inflation a great deal
Portfolio advice for a multifactor world
by John H Cochrane
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11 editions published in 1999 in English and held by 83 WorldCat member libraries worldwide Abstract: Asset returns, it turns out, do not follow the Capital Asset Pricing Model, and are somewhat predictable over time. I survey and interpret the large body of recent work that adapts traditional portfolio theory to answer, what should an investor do about these new facts in finance? I survey the extension of the famous 2  fund' theorem to an Nfund'' theorem in which investors either hedge or assume the additional, nonmarket, sources of priced risk; I survey the burgeoning literature on timevarying portfolio rules and the Bayesian literature that advocates a great deal of caution. In a survey, I emphasize the risksharing nature of asset markets, I note the likelihood that many supposed anomalies will not last, and I emphasize the fact that the average investor must hold the market so portfolio decisions must be driven by differences between an investor and the average investor
Where is the market going? : uncertain facts and novel theories
by John H Cochrane
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12 editions published between 1997 and 1998 in English and held by 82 WorldCat member libraries worldwide Will the stock market provide high returns in the future as it has in the past? The average US stock return in the postwar period has been about 8% above treasury bill rates. But that average is poorly measured: The standard confidence interval extends from 3% to 13%. Furthermore, expected returns are low at times such as the present of high prices. Therefore, the statistical evidence suggests a period of low average returns, followed by a slow reversion to a poorly measured long term average. I turn to a detailed survey of economic theory, to see if models that summarize a vast amount of other information shed light on stock returns. Standard models predict nothing like the historical equity premium. After a decade of effort, a range of drastic modifications to the standard model can account for the historical equity premium. It remains to be seen whether the drastic modifications and a high equity premium, or the standard model and a low equity premium, will triumph in the end. Therefore, economic theory gives one reason to fear that average excess returns will not return to 8% after the period of low returns signaled by today's high prices. I conclude with a warning that low average returns does not imply one should change one's portfolio. Someone has to hold the market portfolio; one should only deviate from that norm if one is different from everyone else
Beyond arbitrage : "gooddeal" asset price bounds in incomplete markets
by John H Cochrane
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12 editions published between 1996 and 1998 in English and held by 82 WorldCat member libraries worldwide It is often useful to price assets and other random payoffs by reference to other observed prices rather than construct fullfledged economic asset pricing models. This approach breaks down if one cannot find a perfect replicating portfolio. We impose weak economic restrictions to derive usefully tight bounds on asset prices in this situation. The bounds basically rule out high Sharpe ratios  good deals'  as well as arbitrage opportunities. We present the method of calculation, we extend it to a multiperiod context by finding a recursive solution, and we apply it to option pricing examples including the BlackScholes setup with infrequent trading, and a model with stochastic stock volatility and a varying riskfree rate
Explaining the poor performance of consumptionbased asset pricing models
by John Y Campbell
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13 editions published in 1999 in English and held by 81 WorldCat member libraries worldwide Abstract: The poor performance of consumptionbased asset pricing models relative to traditional portfoliobased asset pricing models is one of the great disappointments of the empirical asset pricing literature. We show that the external habitformation model economy of Campbell and Cochrane (1999) can explain this puzzle. Though artificial data from that economy conform to a consumptionbased model by construction, the CAPM and its extensions are much better approximate models than is the standard power utility specification of the consumptionbased model. Conditioning information is the central reason for this result. The model economy has one shock, so when returns are measured at sufficiently high frequency the consumptionbased model and the CAPM are equivalent and perfect conditional asset pricing models. However, the model economy also produces timevarying expected returns, tracked by the dividendprice ratio. Portfoliobased models capture some of this variation in state variables, which a stateindependent function of consumption cannot capture, and so portfoliobased models are better approximate unconditional asset pricing models
Money as stock : price level determination with no money demand
by John H Cochrane
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13 editions published between 1999 and 2000 in English and held by 80 WorldCat member libraries worldwide Abstract: I show that a determinate, finite price level can be achieved in an economy with no monetary frictions, and no commodity standard or other explicit redemption commitment. I make one small modification to a standard cash in advance model: I reopen the security market at the end of the day. With this modification, overnight money demand is precisely zero. I show that the price level is still determined, however, by the government debt valuation equation. Nominal government debt is, despite appearances, a residual claim to government surpluses. Thus, the price level is determined just like the price of stock, and just as if we used (say) Microsoft stock as numeraire, unit of account, and medium of exchange. I resolve Buiter's (1999) criticism that fiscal price level determination mistreats the government budget constraint. The government is not forced by a budget constraint to raise surpluses in response to an offequilibrium deflation, just as Microsoft is not forced to raise earnings if there is a bubble in its stock price. I also address McCallum's (1998) criticism that fiscal models do not properly treat indeterminacies, and a number of other confusions and misconceptions surrounding fiscal price level determination. I provide a taxonomy of fiscal and monetary regimes
Shocks
by John H Cochrane
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10 editions published between 1994 and 1995 in English and held by 77 WorldCat member libraries worldwide What are the shocks that drive economic fluctuations? I examine technology and money shocks in some detail, and briefly review the evidence on oil price and credit shocks. I conclude that none of these popular candidates accounts for the bulk of economic fluctuations. I then examine whether 'consumption shocks, ' news that agents see but we do not, can account for fluctuations. I find that it may be possible to construct models with this feature, though it is more difficult than is commonly realized. If this view is correct, we will forever remain ignorant of the fundamental causes of economic fluctuations
Identifying the output effects of monetary policy
by John H Cochrane
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Book
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8 editions published in 1995 in English and held by 75 WorldCat member libraries worldwide
Stocks as money : convenience yield and the techstock bubble
by John H Cochrane
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11 editions published in 2002 in English and held by 74 WorldCat member libraries worldwide Abstract: What caused the rise and fall of tech stocks? I argue that a mechanism much like the transactions demand for money drove many stock prices above the 'fundamental value' they would have had in a frictionless market. I start with the Palm/3Com microcosm and then look at tech stocks in general. High prices are associated with high volume, high volatility, low supply of shares, wide dispersion of opinion, and restrictions on longterm short selling. I review competing theories, and only the convenience yield view makes all these connections
A rehabilitation of stochastic discount factor methodology
by John H Cochrane
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10 editions published in 2001 in English and held by 73 WorldCat member libraries worldwide Abstract: In a recent Journal of Finance article, Kan and Zhou (1999) find that the 'Stochastic discount factor' methodology using GMM is markedly inferior to traditional maximum likelihood even in a simple test of the static CAPM with i.i.d. normal returns. This result has gained wide attention. However, as Jagannathan and Wang (2001) point out, this result flows from a strange assumption: Kan and Zhou allow the ML estimate to know the mean market return exante. I show how this information advantage explains Kan and Zhou's results. In fact, when treated symmetrically, the discount factor  GMM and traditional methodologies behave almost identically in linear i.i.d. environments
The risk and return of venture capital
by John H Cochrane
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Book
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12 editions published between 2000 and 2001 in English and held by 73 WorldCat member libraries worldwide Abstract: This paper measures the mean, standard deviation, alpha and beta of venture capital investments, using a maximum likelihood estimate that corrects for selection bias. Since firms go public when they have achieved a good return, estimates that do not correct for selection bias are optimistic. The selection bias correction neatly accounts for log returns. Without a selection bias correction, I find a mean log return of about 100% and a log CAPM intercept of about 90%. With the selection bias correction, I find a mean log return of about 7% with a 2% intercept. However, returns are very volatile, with standard deviation near 100%. Therefore, arithmetic average returns and intercepts are much higher than geometric averages. The selection bias correction attenuates but does not eliminate high arithmetic average returns. Without a selection bias correction, I find an arithmetic average return of around 700% and a CAPM alpha of nearly 500%. With the selection bias correction, I find arithmetic average returns of about 53% and CAPM alpha of about 45%. Second, third, and fourth rounds of financing are less risky. They have progressively lower volatility, and therefore lower arithmetic average returns. The betas of successive rounds also decline dramatically from near 1 for the first round to near zero for fourth rounds. The maximum likelihood estimate matches many features of the data, in particular the pattern of IPO and exit as a function of project age, and the fact that return distributions are stable across horizons
Bond risk premia
by John H Cochrane
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Book
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9 editions published in 2002 in English and held by 72 WorldCat member libraries worldwide Abstract: This paper studies time variation in expected excess bond returns. We run regressions of annual excess returns on forward rates. We find that a single factor predicts 1year excess returns on 15 year maturity bonds with an R2 up to 43%. The single factor is a tentshaped linear function of forward rates. The return forecasting factor has a clear business cycle correlation: Expected returns are high in bad times, and low in good times, and the returnforecasting factor forecasts longrun output growth. The returnforecasting factor also forecasts stock returns, suggesting a common timevarying premium for real interest rate risk. The return forecasting factor is poorly related to level, slope, and curvature movements in bond yields. Therefore, it represents a source of yield curve movement not captured by most term structure models. Though the returnforecasting factor accounts for more than 99% of the timevariation in expected excess bond returns, we find additional, very small factors that forecast equally small differences between long term bond returns, and hence statistically reject a onefactor model for expected returns
The Fed and interest rates : a highfrequency identification
by John H Cochrane
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11 editions published in 2002 in English and held by 71 WorldCat member libraries worldwide We measure monetary policy shocks as changes in the Fed funds target rate that surprise bond markets in daily data. These shock series avoid the omitted variable, timevarying parameter, and orthogonalization problem of monthly VARs, and do not impose the expectations hypothesis. We find surprisingly large and persistent responses of bond yields to these shocks. 10 year rates rise as much as 8/10 of a percent to a one percent target shock. The usual view that monetary policy only temporarily raises long term rates and influences inflation would lead one to predict a negative long rate response
International risk sharing is better than you think : or exchange rates are much too smooth
by Michael W Brandt
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11 editions published in 2001 in English and held by 69 WorldCat member libraries worldwide Abstract: Exchange rates depreciate by the difference between the domestic and foreign marginal utility growths. Exchange rates vary a lot , as much as 10% per year. However, equity premia imply that marginal utility growths vary much more, by at least 50% per year. This means that marginal utility growths must be highly correlated across countries  international risk sharing is better than you think. Conversely, if risks really are not shared internationally, exchange rates should vary more than they do  exchange rates are much too smooth. We calculate an index of international risk sharing that formalizes this intuition in the context of both complete and incomplete capital markets. Our results suggest that risk sharing is indeed very high across several pairs of countries
Two trees : asset price dynamics induced by market clearing
by John H Cochrane
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9 editions published in 2003 in English and held by 65 WorldCat member libraries worldwide "If stocks go up, investors may want to rebalance their portfolios. But investors cannot all rebalance. Expected returns may need to change so that the average investor is still happy to hold the market portfolio despite its changed composition. In this way, simple market clearing can give rise to complex asset market dynamics. We study this phenomenon in a very simple model. Our model has two Lucas trees.' Each tree has i.i.d.dividend growth, and the representative investor has log utility. We are able to give analytical solutions to the model. Despite this simple setup, pricedividend ratios, expected returns, and return variances vary through time. A dividend shock leads to underreaction' in some states, as expected returns rise and prices slowly adjust, and overreaction' in others. Expected returns and excess returns are predictable by pricedividend ratios in the time series and in the cross section, roughly matching value effects and return forecasting regressions. Returns generally display positive serial correlation and negative crossserial correlation, leading to 'momentuem,' but the opposite signs are possible as well. A shock to one asset's dividend a.ects the price and expected return of the other asset, leading to substantial correlation of returns even when there is no correlation of cash flows and giving the appearance of contagion.' Market clearing allows the inverse portfolio' problem to be solved, in which the weights of the assets in the market portfolio are inverted' to solve for the parameters of the assets' return generating process"NBER website more
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Alternative Names
Cochrane, J. R. 1957
Cochrane, John
Cochrane, John H.
Cochrane, John Howland 1957
Howland Cochrane, John 1957
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