Martin Lettau - Academia.edu (original) (raw)

Papers by Martin Lettau

Dynamic models in which agents' behaviour depends on expectations of future prices o... more Dynamic models in which agents' behaviour depends on expectations of future prices or other endogenous variables can have steady states that are stationary equilibria for a wide variety of expectations rules, including rational expectations. When there are multiple steady states, stability is a criterion for selecting predictions of long-run outcomes among them. The purpose of this Paper is to study how sensitive stability is to certain details of the expectations rules, in a simple OLG model with constant government debt that is financed through seigniorage. We compare simple recursive learning rules, learning rules with vanishing gain, and OLS learning, and also relate these to expectational stability. One finding is that two adaptive expectation rules that differ only in whether they use current information can have opposite stability properties.

sset market values react to economic news and policy changes, and consumers react to changes in a... more sset market values react to economic news and policy changes, and consumers react to changes in asset market values. The consumption-wealth channel of monetary policy spells out this mechanism: changes in monetary policy affect

This paper explores the ability of conditional versions of the CAPM and the consumption CAPM—join... more This paper explores the ability of conditional versions of the CAPM and the consumption CAPM—jointly the (C)CAPM—to explain the cross section of average stock returns. Central to our approach is the use of the log consumption–wealth ratio as a conditioning variable. We demonstrate that such conditional models perform far better than unconditional specifications and about as well as the Fama-French three-factor model on portfolios sorted by size and book-to-market characteristics. The conditional consumption CAPM can account for the difference in returns between low-book-to-market and high-bookto-market portfolios and exhibits little evidence of residual size or book-to-market effects. We are grateful to Eugene Fama and Kenneth French for graciously providing the

We study the role of information in asset pricing models with long-run cash flow risk. To illustr... more We study the role of information in asset pricing models with long-run cash flow risk. To illustrate the importance of the information structure, we show how the implications of the long-run risk paradigm for the cross-sectional properties of stock returns and cash flow duration are affected by information. When investors can fully distinguish short- and long- run consumption risk components of dividend growth innovations (full information), only exposure to long-run consumption risk generates significant risk premia, implying that high-return value stocks are long-duration assets, contrary to the historical data. By contrast, when investors observe the change in consumption and dividends each period but not the individual components of that change (limited information), exposure to short-run risk can generate large risk premia, so that high-return value stocks are short-duration assets while low-return growth stocks are long-duration assets, as in the data. We also show that, in or...

Millimeter and Submillimeter Detectors for Astronomy, 2003

We have used digital photogrammetry to accurately measure the surface of the KOSMA 3m-telescope&#... more We have used digital photogrammetry to accurately measure the surface of the KOSMA 3m-telescope's primary mirror. The method uses a large number of optical photographs of the telescope, taken from many different viewing angles to reconstruct the three-dimensional mirror surface. Thin retro-reflective targets are applied to the mirror in the places of interest. With a large format, high resolution metric CCD-camera a series of pictures is taken under many different viewing angles. A computer program compares the image data and constructs a three dimensional model of the target positions. We used approximately 100-230 targets distributed over the primary mirror and about 50 exposures to reconstruct the KOSMA telescope surface. The measurement accuracy is approximately 10 mum (RMS). The measured mean deviation between the initial surface setup and the ideal parabola was confirmed independently by planetary observations at 345, 492, 660, and 810 GHz. The frequency dependence of the beam efficiencies, derived from scans on Jupiter, follows the Ruze-formula for an initial surface error of 35+/-5 microns. This error was reduced by subsequent adjustments using surface maps of the deviations derived from the photogrammetric data sets. New observations of Jupiter to confirm this improvement are pending.

Evidence of stock return predictability by financial ratios is still controversial, as documented... more Evidence of stock return predictability by financial ratios is still controversial, as documented by inconsistent results for in-sample and out-of-sample regressions and by substantial parameter instability. This paper shows that these seemingly incompatible results can be reconciled if the assumption of a fixed steady-state mean of the economy is relaxed. We find strong empirical evidence in support of shifts in

ABSTRACT The downside risk CAPM (DR-CAPM) can price the cross section of currency returns. The ma... more ABSTRACT The downside risk CAPM (DR-CAPM) can price the cross section of currency returns. The market-beta differential between high and low interest rate currencies is higher conditional on bad market returns, when the market price of risk is also high, than it is conditional on good market returns. Correctly accounting for this variation is crucial for the empirical performance of the model. The DR-CAPM can jointly explain the cross section of equity, commodity, sovereign bond and currency returns, thus offering a unified risk view of these asset classes. In contrast, popular models that have been developed for a specific asset class fail to jointly price other asset classes.

Dynamic models in which agents' behaviour depends on expectations of future prices o... more Dynamic models in which agents' behaviour depends on expectations of future prices or other endogenous variables can have steady states that are stationary equilibria for a wide variety of expectations rules, including rational expectations. When there are multiple steady states, stability is a criterion for selecting predictions of long-run outcomes among them. The purpose of this Paper is to study how sensitive stability is to certain details of the expectations rules, in a simple OLG model with constant government debt that is financed through seigniorage. We compare simple recursive learning rules, learning rules with vanishing gain, and OLS learning, and also relate these to expectational stability. One finding is that two adaptive expectation rules that differ only in whether they use current information can have opposite stability properties.

sset market values react to economic news and policy changes, and consumers react to changes in a... more sset market values react to economic news and policy changes, and consumers react to changes in asset market values. The consumption-wealth channel of monetary policy spells out this mechanism: changes in monetary policy affect

This paper explores the ability of conditional versions of the CAPM and the consumption CAPM—join... more This paper explores the ability of conditional versions of the CAPM and the consumption CAPM—jointly the (C)CAPM—to explain the cross section of average stock returns. Central to our approach is the use of the log consumption–wealth ratio as a conditioning variable. We demonstrate that such conditional models perform far better than unconditional specifications and about as well as the Fama-French three-factor model on portfolios sorted by size and book-to-market characteristics. The conditional consumption CAPM can account for the difference in returns between low-book-to-market and high-bookto-market portfolios and exhibits little evidence of residual size or book-to-market effects. We are grateful to Eugene Fama and Kenneth French for graciously providing the

We study the role of information in asset pricing models with long-run cash flow risk. To illustr... more We study the role of information in asset pricing models with long-run cash flow risk. To illustrate the importance of the information structure, we show how the implications of the long-run risk paradigm for the cross-sectional properties of stock returns and cash flow duration are affected by information. When investors can fully distinguish short- and long- run consumption risk components of dividend growth innovations (full information), only exposure to long-run consumption risk generates significant risk premia, implying that high-return value stocks are long-duration assets, contrary to the historical data. By contrast, when investors observe the change in consumption and dividends each period but not the individual components of that change (limited information), exposure to short-run risk can generate large risk premia, so that high-return value stocks are short-duration assets while low-return growth stocks are long-duration assets, as in the data. We also show that, in or...

Millimeter and Submillimeter Detectors for Astronomy, 2003

We have used digital photogrammetry to accurately measure the surface of the KOSMA 3m-telescope&#... more We have used digital photogrammetry to accurately measure the surface of the KOSMA 3m-telescope's primary mirror. The method uses a large number of optical photographs of the telescope, taken from many different viewing angles to reconstruct the three-dimensional mirror surface. Thin retro-reflective targets are applied to the mirror in the places of interest. With a large format, high resolution metric CCD-camera a series of pictures is taken under many different viewing angles. A computer program compares the image data and constructs a three dimensional model of the target positions. We used approximately 100-230 targets distributed over the primary mirror and about 50 exposures to reconstruct the KOSMA telescope surface. The measurement accuracy is approximately 10 mum (RMS). The measured mean deviation between the initial surface setup and the ideal parabola was confirmed independently by planetary observations at 345, 492, 660, and 810 GHz. The frequency dependence of the beam efficiencies, derived from scans on Jupiter, follows the Ruze-formula for an initial surface error of 35+/-5 microns. This error was reduced by subsequent adjustments using surface maps of the deviations derived from the photogrammetric data sets. New observations of Jupiter to confirm this improvement are pending.

Evidence of stock return predictability by financial ratios is still controversial, as documented... more Evidence of stock return predictability by financial ratios is still controversial, as documented by inconsistent results for in-sample and out-of-sample regressions and by substantial parameter instability. This paper shows that these seemingly incompatible results can be reconciled if the assumption of a fixed steady-state mean of the economy is relaxed. We find strong empirical evidence in support of shifts in

ABSTRACT The downside risk CAPM (DR-CAPM) can price the cross section of currency returns. The ma... more ABSTRACT The downside risk CAPM (DR-CAPM) can price the cross section of currency returns. The market-beta differential between high and low interest rate currencies is higher conditional on bad market returns, when the market price of risk is also high, than it is conditional on good market returns. Correctly accounting for this variation is crucial for the empirical performance of the model. The DR-CAPM can jointly explain the cross section of equity, commodity, sovereign bond and currency returns, thus offering a unified risk view of these asset classes. In contrast, popular models that have been developed for a specific asset class fail to jointly price other asset classes.