Dave Berger

Is the Diversification Benefit of Frontier Markets Realizable by Mean-Variance Investors? The Evidence of Investable Funds

The authors investigate whether the diversification benefits of frontier markets are realizable. They focus on investable frontier exchange-traded funds (ETFs) and their corresponding indices. Their analysis ncludes directly measuring the economic benefits of frontier-market diversification, as well as considering frontier-market trading dynamics. Evidence indicates that frontier markets offer diversification benefits through risk-reducing potential. The authors find that frontier market volatility tends to be largely idiosyncratic, which supports the risk-reducing role of frontier markets. Their comparison of funds and indices indicates that, to the extent that frontier-market indices offer hypothetical benefits, traders can obtain these benefits by using investable funds.

On Valuing Human Capital And Relating it to Macro-Economic Conditions

Human capital is the largest component of aggregate wealth, but its relation to other macroeconomic variables is murky due to the lack of market prices. Valuing human capital using historical costs or expected income is characterized by substantial measurement error. We develop a human capital index using slave prices and relate its dynamics to that of other indicators including equities, GDP, real estate and interest rates. The human capital values are extrapolated from the 19th Century to the modern era. Their evolution has substantial implications for our understanding of the human capital dynamics, with applications to growth and portfolio allocation.

Financial turbulence and beta estimation

This study identifies periods of turbulence within financial markets. Capital Asset Pricing Model (CAPM) betas estimated during tranquil periods exhibit little relation between estimated risk and average returns, and further, a majority of considered portfolios exhibit significant abnormal performance, given the tranquil or full-sample beta estimate. However, betas estimated from turbulent subperiods exhibit a strong relation between risk and return. Further, given turbulent betas, the observed performance is frequently consistent with the CAPM. Market betas for small and value portfolios increase during turbulent periods, indicating that the risk of these portfolios is greater than those indicated by standard betas.

Testing the CAPM across observed and fundamental returns

The Capital Asset Pricing Model (CAPM) describes a relationship between risk and expected forward-looking returns. Existing research tests the model using realized returns as the proxy for exante expectations. However, recent studies cast doubt on the ability of expost observed returns to proxy for exante expectations. Using an alternative specification to proxy for investor expectations, I test the CAPM in the context of pricing size and book/market equities. The results indicate that the CAPM retains additional merit with an improved measure of expectations. However, the value premium appears large and significant across both specifications of expected returns.

Investor perceptions and volatility within a risk-return framework

Conditional asset pricing models within the risk-return literature describe a relation between expected risk and return for period t + 1, with expectations formed during period t. Existing risk estimates in the literature are formed using backward looking measures during period t, which are projected forward for period t + 1. Evidence suggests that ex post observations do not always correspond with conditional ex ante expectations. Using forward-looking survey data, I compare measures of expected risk, with common estimates of risk in the literature. Supporting empirical research, I find a strong relation between forward-looking investor risk perceptions and conditional risk estimates.