<http://papers.ssrn.com/paper.taf?ABSTRACT_ID=171723>
New Facts in Finance JOHN H. COCHRANE University of Chicago; National Bureau of Economic Research (NBER)
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June 1999 Center for Research in Security Prices (CRSP) Working Paper No. 490 & NBER Working Paper No. 7169
Abstract:
The last 15 years have seen a revolution in the way financial economists understand the world around us. We once thought that stock and bond returns were essentially unpredictable. Now we recognize that stock and bond returns have a substantial predictable component at long horizons. We once thought the capital asset pricing model (CAPM) provided a good description of why average returns on some stocks, portfolios, funds or strategies were higher than others. Now we recognize that the average returns of many investment opportunities cannot be explained by the CAPM, and "multifactor models" have supplanted the CAPM to explain them. We once thought that long-term interest rates reflected expectations of future short term rates and that interest rate differentials across countries reflected expectations of exchange-rate depreciation. Now, we see time-varying risk premia in bond and foreign exchange markets as well as in stock markets. Once, we thought that mutual fund average returns were well explained by the CAPM. Now, we recognize ``value'' and other high return strategies in funds, and slight persistence in fund performance.