| The literature on economic risk premiums has largely been based on ex post returns. In Chapter 1, I construct and assess implied ex ante economic risk premiums for a list of economic factors, which are driving forces in various asset pricing models, using direct expected returns estimates---i.e., the implied costs of capital (ICCs). For most economic factors, ICCs support significant nonzero average economic risk premiums which ex post returns fail to uncover since ex post returns are too volatile, implying that many economic factors are actually priced from an ex ante perspective. Second, implied ex ante factor risk premiums are a new and powerful predictor for future ex post returns of factor mimicking portfolios for most economic factors (e.g., value and size factors, default spread, inflation, the growth rate of labor income, and one-month T-bill real return), both in sample and out of sample. Analyses suggest that time-varying ex ante economic risk premiums are at least one major reason for the predictability of ICCs.;In Chapter 2, I show that a stock return can be expressed as a sum of two components, which are a change in the stock's fundamental value measured using tangible information such as accounting information and analysts' forecasts, and a change in the deviation of the stock's price from its fundamental value. I decompose the selectivity of mutual fund managers into their abilities to predict those two return components, and use the new decomposition to describe fund managers' investment styles in a new way, reflecting their focuses on return components when investing. Average fund managers focus on price deviation information rather than fundamentals to guide their investments. Further, there is some significant evidence that these new styles can predict fund managers' performance around announcements of new earnings or new analysts' recommendations, and such performance predictability is at least partially driven by managers' exploitation of the stock return predictability attributed to stocks' fundamental value-price ratios proposed in Frankel & Lee (1998). |
