Essays on Empirical Asset Pricing

The dissertation consists of four essays on empirical asset pricing. The first chapter reexamines the existence of time series momentum. Time series momentum (TSM) refers to the predictability of the past 12-month return on the next one-month. Using the same data set as Moskowitz, Ooi, and Pedersen (2012) (MOP, henceforth), we show that asset-by-asset time series regressions reveal little evidence of TSM, both in- and out-of-sample. While the t -statistic in a pooled regression appears large, it is not statistically reliable as it is less than the critical values of parametric and nonparametric bootstraps. From an investment perspective, the performance of TSM strategy is virtually the same as that of a similar strategy that is based on historical sample mean and does not require predictability. Overall, the evidence on TSM is weak, particularly for the large cross section of assets. The second chapter focuses on disagreement, which is regarded as “the best horse” for behavioral finance to obtain as many insights as classic asset pricing theories. Existing disagreement measures are known to predict cross-sectional stock returns but fail to predict market returns. We propose a disagreement index by aggregating information across individual measures using partial least squares (PLS) method. This index significantly predicts market returns both in- and out-of-sample. Moreover, the predictability of our disagreement index is stronger in high sentiment periods, more likely to operate via a cash flow channel, and extends to market volatility and trading volume. The third and fourth chapter investigates the impacts of political uncertainty. We focus on one type of political uncertainty, partisan conflict, which is caused by the dispute or disagreement among party members or policy makers. Chapter three finds that partisan conflict positively predicts stock market returns. Increased partisan conflict is associated with increased fiscal policy and healthcare policy uncertainties. Investors do pay attention to partisan conflict and switch their investments from equities to bonds. Chapter four shows that intensified partisan conflict widens corporate credit spreads. The results hold when using instrumental variables to resolve endogeneity concerns. We further find that partisan conflict has a greater impact on corporate credit spreads for firms with higher exposure to government policies, for firms with higher dependence on external finance, and for firms that are actively involved in political activities.