Animal Spirits versus Rational Market: Measuring Risk and Return Relation Based on Fundamentals

Speaker: Jun Tu Singapore Management University

Topic:	Animal Spirits versus Rational Market: Measuring Risk and Return Relation Based on Fundamentals
Date:	May 18, 2017
Venue:	Room 502, Daoyuan Building, CUHK(SZ)
Speaker:	Jun Tu Singapore Management University
Detail/Abstract:	Studies have examined the risk and return relation, which should be theoretically positive according to Merton's ICAPM model. However, the risk and return relation is surprisingly weak and even negative empirically. We argue that the theoretically positive risk and return relation might have been weakened or even reversed empirically by non-fundamental forces or ``animal spirits''. Given that the animal spirits could be one key reason for the existing mixed and sensitive results, we measure the risk-return relation conditioning on fundamentals only. Now the impact of non-fundamental forces has been largely controlled and a positive risk and return relation can be restored.