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Papers by Michael Brennan

Research paper thumbnail of Capital Gains Taxes, Agency Costs, and Closed-End Fund Discounts

SSRN Electronic Journal, 2007

Research paper thumbnail of How Did It Happen?

Economic Notes, 2004

This paper discusses the factors that led up to the stock price bubble of the 1990s. Foremost amo... more This paper discusses the factors that led up to the stock price bubble of the 1990s. Foremost among these, it is argued, was the conventional view that stocks are the investment of choice for the long‐run investor regardless of their price. This conventional view was based on a misunderstanding of academic theories developed over the past half century. Additional factors were the changing nature of US pensions which placed much more responsibility on the shoulders of the individual investor, and agency problems in investment management and the production of information about firm profitability. Finally there is some evidence that required rates of return were declining during this period. (J.E.L.: G10 and G23).

Research paper thumbnail of Keywords: Jensen’s Inequality, Asset Pricing Test

for helpful comments on an earlier version of the paper which was circulated under the title Asse... more for helpful comments on an earlier version of the paper which was circulated under the title Asset Pricing and Mispricing. We also thank participants in seminars at the Conference of Barclays Global Investors,

Research paper thumbnail of High-Frequency Measures of Information Risk

SSRN Electronic Journal, 2015

Research paper thumbnail of Intertemporal Capital Asset Pricing and the Fama-French Three-Factor Model

SSRN Electronic Journal, 2001

Research paper thumbnail of A re-examination of some popular security return anomalies

Research paper thumbnail of Persistence, Predictability, and Portfolio Planning

Handbook of Quantitative Finance and Risk Management, 2010

Research paper thumbnail of The Mispricing Return Premium

Review of Financial Studies, 2010

Research paper thumbnail of Alternative factor specifications, security characteristics, and the cross-section of expected stock returns1We are especially grateful to Eugene Fama (a referee), an anonymous referee and Bill Schwert (the editor) for insightful and constructive suggestions. We also thank Wayne Ferson, Ken Frenc...

Journal of Financial Economics, 1998

Research paper thumbnail of Asset Pricing and Mispricing

SSRN Electronic Journal, 2007

Research paper thumbnail of Capital Asset Pricing with a Stochastic Horizon

SSRN Electronic Journal, 2011

Research paper thumbnail of Option Pricing Kernels and the ICAPM

SSRN Electronic Journal, 2006

Research paper thumbnail of International Capital Markets and Foreign Exchange Risk

Review of Financial Studies, 2006

Research paper thumbnail of Stock price volatility and equity premium

Journal of Monetary Economics, 2001

Research paper thumbnail of The pricing of equity-linked life insurance policies with an asset value guarantee

Journal of Financial Economics, 1976

Research paper thumbnail of The dynamics of international equity market expectations

Journal of Financial Economics, 2005

Research paper thumbnail of Assessing Assets Pricing Anomalies

Research paper thumbnail of Agency and asset pricing

In this paper we present new empirical evidence on the agency based asset pricing model of Brenna... more In this paper we present new empirical evidence on the agency based asset pricing model of Brennan (1993). We find strong evidence that in the recent period stocks whose returns covary more with the idiosyncratic component of the S&P500 return have significantly lower returns, holding constant either the market beta or the loadings on the Fama-French factors. The effect is confined mainly to large capitalization stocks, which is consistent with previous evidence that these stocks are favored by institutional investment managers. The lack of evidence for an agency effect in earlier years is also consistent with the much smaller importance of institutional investors in the earlier period and to the late development of risk-adjusted approaches to measuring portfolio management performance.

Research paper thumbnail of Stock Price Volatility, Learning, and the Equity Premium

The determination of stock prices and equilibrium expected rates of return in a general equilibri... more The determination of stock prices and equilibrium expected rates of return in a general equilibrium setting is still imperfectly understood. In particular, as Grossman and Shiller (1981) and others have argued, stock returns appear to be too volatile given the smooth process for dividends and consumption growth. Mehra and Prescott (1985) claim that this smoothness in consumption and dividend growth gives rise to an “equity premium paradox” since it makes it impossible to explain the equity risk premium with a risk aversion parameter of less than an implausible 35. This paper reconciles the apparent smoothness of aggregate dividends and the volatility of observed stock prices by developing a model of stock prices in a dynamic general equilibrium setting in which learning is important. Dividends, which are one component of the aggregate consumption endowment, are assumed to follow a stochastic process with a mean-reverting drift that is not directly observable by the representative ag...

Research paper thumbnail of Informed Trading and the Pricing of Good and Bad Private Information in the Cross-Section of Expected Stock Returns

Informed Trading and the Pricing of Good and Bad Private Information in the Cross-Section of Expe... more Informed Trading and the Pricing of Good and Bad Private Information in the Cross-Section of Expected Stock Returns We decompose PIN, the Probability of Informed Trading, into components that capture informed trading on good news (PIN G) and on bad news (PIN B), and provide new evidence that PIN and its components capture informed trading around quarterly earnings announcements. Our principal result concerns asymmetry in the pricing of the two PIN components: we find that the return premium for PIN B is large and highly significant, while that for PIN G is much smaller and is statistically insignificant. JEL Classification: G12

Research paper thumbnail of Capital Gains Taxes, Agency Costs, and Closed-End Fund Discounts

SSRN Electronic Journal, 2007

Research paper thumbnail of How Did It Happen?

Economic Notes, 2004

This paper discusses the factors that led up to the stock price bubble of the 1990s. Foremost amo... more This paper discusses the factors that led up to the stock price bubble of the 1990s. Foremost among these, it is argued, was the conventional view that stocks are the investment of choice for the long‐run investor regardless of their price. This conventional view was based on a misunderstanding of academic theories developed over the past half century. Additional factors were the changing nature of US pensions which placed much more responsibility on the shoulders of the individual investor, and agency problems in investment management and the production of information about firm profitability. Finally there is some evidence that required rates of return were declining during this period. (J.E.L.: G10 and G23).

Research paper thumbnail of Keywords: Jensen’s Inequality, Asset Pricing Test

for helpful comments on an earlier version of the paper which was circulated under the title Asse... more for helpful comments on an earlier version of the paper which was circulated under the title Asset Pricing and Mispricing. We also thank participants in seminars at the Conference of Barclays Global Investors,

Research paper thumbnail of High-Frequency Measures of Information Risk

SSRN Electronic Journal, 2015

Research paper thumbnail of Intertemporal Capital Asset Pricing and the Fama-French Three-Factor Model

SSRN Electronic Journal, 2001

Research paper thumbnail of A re-examination of some popular security return anomalies

Research paper thumbnail of Persistence, Predictability, and Portfolio Planning

Handbook of Quantitative Finance and Risk Management, 2010

Research paper thumbnail of The Mispricing Return Premium

Review of Financial Studies, 2010

Research paper thumbnail of Alternative factor specifications, security characteristics, and the cross-section of expected stock returns1We are especially grateful to Eugene Fama (a referee), an anonymous referee and Bill Schwert (the editor) for insightful and constructive suggestions. We also thank Wayne Ferson, Ken Frenc...

Journal of Financial Economics, 1998

Research paper thumbnail of Asset Pricing and Mispricing

SSRN Electronic Journal, 2007

Research paper thumbnail of Capital Asset Pricing with a Stochastic Horizon

SSRN Electronic Journal, 2011

Research paper thumbnail of Option Pricing Kernels and the ICAPM

SSRN Electronic Journal, 2006

Research paper thumbnail of International Capital Markets and Foreign Exchange Risk

Review of Financial Studies, 2006

Research paper thumbnail of Stock price volatility and equity premium

Journal of Monetary Economics, 2001

Research paper thumbnail of The pricing of equity-linked life insurance policies with an asset value guarantee

Journal of Financial Economics, 1976

Research paper thumbnail of The dynamics of international equity market expectations

Journal of Financial Economics, 2005

Research paper thumbnail of Assessing Assets Pricing Anomalies

Research paper thumbnail of Agency and asset pricing

In this paper we present new empirical evidence on the agency based asset pricing model of Brenna... more In this paper we present new empirical evidence on the agency based asset pricing model of Brennan (1993). We find strong evidence that in the recent period stocks whose returns covary more with the idiosyncratic component of the S&P500 return have significantly lower returns, holding constant either the market beta or the loadings on the Fama-French factors. The effect is confined mainly to large capitalization stocks, which is consistent with previous evidence that these stocks are favored by institutional investment managers. The lack of evidence for an agency effect in earlier years is also consistent with the much smaller importance of institutional investors in the earlier period and to the late development of risk-adjusted approaches to measuring portfolio management performance.

Research paper thumbnail of Stock Price Volatility, Learning, and the Equity Premium

The determination of stock prices and equilibrium expected rates of return in a general equilibri... more The determination of stock prices and equilibrium expected rates of return in a general equilibrium setting is still imperfectly understood. In particular, as Grossman and Shiller (1981) and others have argued, stock returns appear to be too volatile given the smooth process for dividends and consumption growth. Mehra and Prescott (1985) claim that this smoothness in consumption and dividend growth gives rise to an “equity premium paradox” since it makes it impossible to explain the equity risk premium with a risk aversion parameter of less than an implausible 35. This paper reconciles the apparent smoothness of aggregate dividends and the volatility of observed stock prices by developing a model of stock prices in a dynamic general equilibrium setting in which learning is important. Dividends, which are one component of the aggregate consumption endowment, are assumed to follow a stochastic process with a mean-reverting drift that is not directly observable by the representative ag...

Research paper thumbnail of Informed Trading and the Pricing of Good and Bad Private Information in the Cross-Section of Expected Stock Returns

Informed Trading and the Pricing of Good and Bad Private Information in the Cross-Section of Expe... more Informed Trading and the Pricing of Good and Bad Private Information in the Cross-Section of Expected Stock Returns We decompose PIN, the Probability of Informed Trading, into components that capture informed trading on good news (PIN G) and on bad news (PIN B), and provide new evidence that PIN and its components capture informed trading around quarterly earnings announcements. Our principal result concerns asymmetry in the pricing of the two PIN components: we find that the return premium for PIN B is large and highly significant, while that for PIN G is much smaller and is statistically insignificant. JEL Classification: G12