Average stock returns for North America, Europe, and Asia Pacific increase with the book-to-market ratio (B/M) and profitability and are negatively related to investment. For Japan, the relation between average returns and B/M is strong, but average returns show little relation to profitability or investment. A five-factor model that adds profitability and investment factors to the three-factor model of Fama and French (1993) largely absorbs the patterns in average returns. As in Fama and French, 2015, Fama and French, 2016, the model's prime problem is failure to capture fully the low average returns of small stocks whose returns behave like those of low profitability firms that invest aggressively.
ABSTRACTContrary to conventional wisdom, growth stocks (i.e., low book‐to‐market stocks) do not have substantially higher future cash‐flow growth rates than value stocks, in both rebalanced and buy‐and‐hold portfolios. Efficiency growth, survivorship and look‐back biases, and the rebalancing effect help explain the results. These findings suggest that duration alone is unlikely to explain the value premium.
The revenues of large companies often rival those of national governments, and some companies have annual revenues higher than many national governments. Among the largest corporations in 2015, some had private security forces that rivaled the best secret services, public relations offices that dwarfed a US presidential campaign headquarters, more lawyers than the US Justice Department, and enough money to capture (through campaign donations, lobbying, and even explicit bribes) a majority of the elected representatives. The only powers these large corporations missed were the power to wage war and the legal power of detaining people, although their political influence was sufficiently large that many would argue that, at least in certain settings, large corporations can exercise those powers by proxy. Yet in economics, the commonly prevailing view of the firm ignores all these elements of politics and power. We must recognize that large firms have considerable power to influence the rules of the game. I call attention to the risk of a "Medici vicious circle," in which economic and political power reinforce each other. The possibility and extent of a "Medici vicious circle" depends upon several nonmarket factors. I discuss how they should be incorporated in a broader "Political Theory" of the firm.
The Sharpe ratio and the maximum drawdown (MDD) are two of the most important tools for risk measurement. Existing literatures have presented analytical results relating them under geometric Brownian motion. In this paper, we take a data-driven approach to derive a relationship between expost Sharpe ratio and MDD. We do not assume any specific distribution of the returns except that they be stationary and ergodic. The relationship we derive can serve as a quick sanity check for black-box performance reports if the Sharpe ratios are estimated by the ex-post Sharpe ratio. Some numerical results are given for illustration.
