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Asset Pricing Puzzles

Asset pricing puzzles are an ubiquitous feature of finance and much effort has been
exerted in order to understand them. They pose extraordinary challenges to our common
understanding of finance and we want to explore them in this seminar. In particular, we
want to compare the classical, rational solution approaches and the new behavioral

Closed End Fund Puzzle

2. Equity Risk Premium Puzzle
3. Day of the Week Effects, Year End Effect
4. Fama French Factors, “CAPM is Dead”
5. Pricing Kernel Puzzle
6. The Dividend Puzzle
7. IPO Underpricing Puzzle
8. Home Bias Puzzle
9. Bubbles and Crashes
10. Excess Volatility Puzzle

General literature:
“Inefficient Markets; an introduction to behavioral finance”, Anderei Schleifer, published
byOxford University Press, 2000, Oxford
“Advances in behavioral finance; II”, Richard H. Thaler, will be published by Russell
Sage Foundation, 2005, New York
“Behavioral corporate finance; a survey”, Malcolm Baker and Richard S. Ruback and
Jeffrey Wurgler, published by National Bureau of Economic Research, 2004, Cambridge,
“A survey of behavioral finance”, Nicholas Barberis and Richard Thaler, published by
National Bureau of Economic Research, 2002, Cambridge, Mass.
“Investments”, Sharpe, William F. and Alexander, Gordon J. and Bailey, Jeffery V.
published by Prentice Hall, 1999, Upper Saddler River, NJ

1. Closed End Fund Puzzle

1. Cherkes, Martin (2003). “A Positive Theory of Closed-End Funds as an Investment
Vehicle”, Working Paper, Princeton University, July
2. Dimson, Elroy and Minio-Kozerski, Crolina (1998). “Closed-End Funds: A Survey”,
Working Paper, London Business School and J.P. Morgan Chase & Co., October
3. Doukas, John A. and Milonas, Nikolaos T. (2002). “Investor Sentiment and the Closed-
end Fund Puzzle: Out-of-Sample Evidence”, Working Paper, OldDominion University
and National & Kapodistrian University of Athens, December
4. Garay, Urbi (2001). “The Behavior of Asian and Latin American Closed-End Country
Funds and Investment Trusts Premiums Following the Asian Financial Crisis”, working
Paper, IESA, June
5. Ross, Stephen A. (2005). Chapter 4 in “Neoclassical Finance”, published by Princeton
University Press, ISBN 0-691-12138-9
6. Russel, Philip and Malhotra, D. K. (2004). “Unraveling the Closed-End Funds Pricing
Puzzle: Some New Evidence”, Working Paper, Philadelphia University, January
7. Spiegel, Matthew I. (1998). “Closed-End Fund Discounts in a Rational Agent
Economy”, Working Paper, Yale School of Management, International Center for
Finance, January

2. Equity Risk Premium Puzzle

1. Engsted, Tom and Mammen, Enno and Tanggaard, Carsten (2001). “Evaluating the C-
CAPM and the Equity Premium Puzzle at Short and Long Horizons: A Markovian
Bootstrap Approach”, Working Paper, Aarhus School of Business and University of
Heidelberg, May
2. Gabaix, Xavier and Laibson, David (2001). “The 6D Bias and the Equity Premium
Puzzle”, Working Paper, Massachusetts Institute of Technology and Harvard UniversityJ,
3. Kocherlakota, Narayana R (1996). “The Equity Premium: It's Still a Puzzle”, Journal
of Economic Literature 34, 42-71, March
4. Kurz, Mordecai and Beltratti, Andrea (1996). “The Equity Premium is No Puzzle”,
Working Paper, Stanford Graduate School of Business and Universita Bocconi, Feburary
5. Li, Haitao and Xu, Yuewu (1999). “Can Survival Bias Explain the 'Equity Premium
Puzzle'?”, Working Paper, Cornell University, May
6. Mehra, Rajnish (2003). “The Equity Premium: Why is it a Puzzle?”, Working Paper,
University of California, February
7. Mehra, Rajnish and Prescott, Edward C. (1985). “The Equity Premium: A Puzzle”,
Journal of Monetary Economics, 15(2), 61-145, March

Puzzle”, Working Paper, University of Chicago and Northwestern University, November

3. Day of the Week Effects, Year End Effect

1. Easterday, Kathryn E. (2005). “The Declining January Effect? An Examination of
Market Returns for Firms Trading on NYSE, AMEX and NASDAQ ”, Working Paper,
University of Cincinnati, February
2. Galai, Dan and Kedar-Levy, Haim (2002). “Multiple Comparisons of Return
Distributions: A New Look at the Day-of-the-Week Effect”, Working Paper, Hebrew
University of Jerusalem and Ben-Gurion University of the Negev, Feburary
3. Hansen, Peter Reinhard and Lunde, Asger and Nason, James M. (2005). “Testing the
Significance of Calendar Effects”, Working Paper, Stanford University and Aarhus
School of Business and Federal Reserve Bank of Atlanta, January
4. Mehdian, Seyed M. and Aly, Hassan Yousset and Perry, Mark J. (2004). “An Analysis
of Day-of-the-Week Effects in the Egyptian Stock Market”, Working Paper, International
Journal of Business, May
5. Patev, Plamen Georgiev and Lyroudi, Katerina and Kanaryan, Nigokhos Krikorov
(2004). “The Day of the Week Effect in the Central European Transition Stock Markets”,
Working Paper,
Tsenov Academy of Economics and University of Macedonia, January
6. Singal, Vijay and Chen, Honghui (2001). “What Drives the January Effect?”, Working
Paper, Virginia Polytechnic Institute & State University and University of Central
Florida, April

4. Fama French Factors, “CAPM is Dead”

1. Ajili, Souad (2004). “Size and Book to Market Effects vs. Co-skewness and Co-
kurtosis in Explaining Stock Returns”, Working Paper, Université Paris IX Dauphine –
CEREG, December
2. Carhart, Mark M. (1997). “On Persistence in Mutual Fund Performance”, Working
Paper, GSAM Quantitative Strategies Group, March
3. Chung, Y. Peter and Johnson, Herb and Schill, Michael J. (2004). “Asset Pricing When
Returns Are Nonnormal: Fama-French Factors vs. Higher-Order Systematic Co-
Moments”, Working Paper, University of California at Riverside and University of
California and University
of Virginia, February
4. Fama, E. F. and French, K. R. (1993). “Common risk factors in the returns on stocks
and bonds” Journal of Financial Economics, 33, pp. 3-56.
5. Griffin, John M. (2002). “Are the Fama and French Factors Global or Country-

Working Paper, University of Texas at Austin, January

6. Guidolin, Massimo and Timmermann, Allan G. (2005). “Size and Value Anomalies
Regime Shifts”, Working Paper, Federal Reserve Bank of St. Louis and University of
7. Porras, David M. (1998). “The CAPM vs. the Fama and French Three-Factor Pricing
A Comparison Using Value Line Investment Survey”, Working Paper, Quincy University,
8. Womack, Kent L. and Zhang, Ying (2003). “Understanding Risk and Return, the
CAPM, and
the Fama-French Three-Factor Model”, Working Paper, Dartmouth College, December
5. Pricing Kernel Puzzle
1. Balduzzi, Pierluigi and Kallal, Hedi (1997). “Risk Premia and Variance Bounds”,
Paper, Boston College and Salomon Smith Barney, Inc, December
2. Bernardo, Antonio and Ledoit, Olivier (2000). “Gain, Loss, and Asset Pricing”,
Paper, University of California and Credit Suisse First Boston, February
3. Branger, Nicole and Schlag, Christian (2003). “Why is the Index Smile So Steep?”,
Paper, Goethe University Frankfurt and Goethe University, April
4. Chabi-Yo, and Fousseni and Rene, Garcia, and Eric, Renault (2004). “State
Dependence in Fundamentals and Preferences Explains Risk Aversion Puzzle”, Working
Paper, Universite de Montreal and Bank of Canada, November
5. Chernov, Mikhail (2000). “A Case of Empirical Reverse Engineering: Estimation of
the Pricing Kernel”, Working Paper, Columbia Business School, March
6. Jackwerth, Jens Carsten and Brown, David P. (2002). “The Pricing Kernel Puzzle:
Reconciling Index Option Data and Economic Theory”, Working Paper, Universität
Konstanz and University
of Wisconsin – Madison, February
7. Rosenberg, Joshua V. and Engle, Robert E. (2002). “Empirical Pricing Kernels”,
Paper, Federal Reserve Bank of New York and New York University, June
8. Ziegler, Alexander (2002). “Why Does Implied Risk Aversion Smile?”, Working Paper,
University of Lausanne, May

6. The Dividend Puzzle

1. Bernheim, B. Douglas (1990). “Tax Policy and the Dividend Puzzle”, Working Paper,
Stanford University, September
Deangelo, Harry and Deangelo, Linda (2004). “Payout Policy Irrelevance and the
Puzzle”, Working Paper, University of Southern California, March
4. Frankfurter, George (1999). “What is the Puzzle in the Dividend Puzzle”, Working
University of Florida April
5. Milonas, Nikolaos T. and Travlos, Nickolaos G. (2001). “The Ex-dividend Day Stock
Behavior in the Athens Stock Exchange”, Working Paper, National & Kapodistrian
University of
Athens and Athens Laboratory of Business Administration, June
6. Milonas, Nikolaos T. and Travlos, Nickolaos G. and Xiao, Zezhong and Tan, Cunkai
“The Ex-Dividend Day Stock Price Behavior in the Chinese Stock Market”, Working
National & Kapodistrian University of Athens and Athens Laboratory of Business
and University of Wales System, April
7. Grullon, Gustavo and Michaely, Roni (2000). “Dividends, Share Repurchases, and the
Substitution Hypothesis”, Working Paper, Rice University and Cornell University, April

7. IPO Underpricing Puzzle

1. Bachmann, Ralph (2004). “Theory of IPO Underpricing, Issue Activity, and Long-Run
Underperformance”, Working Paper, Nanyang Technological University, September
2. Lungqvist, Alexander (2004). “IPO Underpricing: A Survey”, Working Paper, New
University, CEPR and ECGI, October
3. Loughran, Tim and Ritter, Jay R. (2002). “Why Has IPO Underpricing Changed Over
Working Paper, University of Notre Dame and University of Florida, December
4. Reese JR., William A. (1998). “IPO Underpricing, Trading Volume, and Investor
Working Paper, Tulane University, September
5. Sherman, Ann E. and Titman, Sheridan (2002). “Building the IPO Order Book:
and Participation Limits With Costly Information”, Working Paper, University of Notre
Dame and University of Texas at Austin, Oktober
6. Liu, Ti (2003). “Investment without Risk: An Empirical Investigation of IPO
Underpricing in
China”, Working Paper, Shanghai Stock Exchange, July

8. Home Bias Puzzle

1. Cooper, Ian and Kaplanis, Evi (1994). “Home Bias in Equity Portfolios, Inflation
Hedging, andInternational Capital Market Equilibrium”, Review of Financial Studies,
Vol. 7, No.1, 45-60,
2. Feldman, David and Bar Niv, Moshe (2004). “Forum Selection in International
Contracts: Home Bias Portfolio Puzzle and Managerial Moral Hazard”, Working Paper,
University of New South Wales and Interdisciplinary Center Herzliyah, April
3. Michaelides, Alexander (2002). “International Portfolio Choice, Liquidity Constraints
and the
Home Equity Bias Puzzle”, Working Paper, LondonSchool of Economics, August
4. Nieuwerburgh, Stijn Van and Veldkamp, Laura (2005). “Information Immobility and
Home Bias Puzzle”, Working Paper, New York University, March
5. Pesenti, Paolo A. and Wincoop, Eric Van (1996). “Do Nontraded Goods Explain the
Bias Puzzle?”, Working Paper, Federal Reserve Bank of New York and University of
6. Shore, Stephen H. and White, Joshua S. (2002). “External Habit Formation and the
Home Bias
Puzzle”, Working Paper, Harvard University and Harvard Business School, November
7. Turrini, Alessandro and Ypersele, Tanguy Van (2001). “Traders, Courts and the Home
Puzzle”, Working Paper, European Commission and Facultés Universitaires Notre-Dame
de la
Paix, November
9. Bubbles and Crashes
1. Abreu, Dilip and Brunnermeier, Markus K. (2001). “Bubbles and Crashes”, Working
Princeton University, November
2. Bates, David S. (2001). “The Market for Crash Risk”, Working Paper, University of
3. Giardina, Irene and Bouchaud, Jean-Philippe (2002). “Bubbles, Crashes and
Intermittency in
Agent Based Market Models”, Working Paper, University of Rome I and Centre d'Etudes
Saclay, September
4. Grauwe, Paul De and Grimaldi, Marianna (2004). “Bubbles and Crashes in a
Finance Model”, Working Paper, Katholieke Universiteit Leuven, May
5. Gustman, Alan L. and Steinmeier, Thomas L. (2002). “Retirement and the Stock
Bubble”, Working Paper, Dartmouth College and Texas Tech University, December
6. Johansen, Anders (2004). “Origin of Crashes in 3 US Stock Markets: Shocks and
Working Paper, Riso National Laboratory, February10. Excess Volatility Puzzle
1. Agyei-Ampomah, Samuel and Davies, J.R. (2002). “Excess Volatility and UK
Trusts”, Working Paper, Aston University and University of Strathclyde in Glasgow, June
2. Delong, J. Bradford and Becht, Marco (1992) “'Excess Volatility' and the German
Market, 1876-1990”, Working Paper, University of California and European Corporate
Governance Institute, April
3. Marcus, Alan J. (1998). “Equilibrium Theory of Excess Volatility and Mean Reversion
Stock Market Prices”, Working Paper, Boston College, September
4. Marsili, Matteo and Challet, Damien (2000). “Trading Behavior and Excess Volatility
in Toy
Markets”, Working Paper, Istituto Nazionale Fisica della Materia (INFM) and University
Oxford, May
5. Pontiff, Jeffrey (1998). “Excess Volatility and Closed-End Funds”, Working Paper,
College, June
6. Rodriguez, Juan Carlos (2005). “Hedging Demand and Excess Volatility in Dynamic
Economies”, Working Paper, Tilburg University and CentER, January