Cochrane, John H.
Overview
Works: 
63
works in
341
publications in
1
language and
3,463
library holdings

Classifications: 
HG4636,
332.6 
Most widely held works by
John H Cochrane
Asset pricing by John H Cochrane (
Book
)
23
editions published
between
2001
and
2008
in
English and Undetermined
and held by
885
libraries
worldwide
"Written to be a summary for academics and professionals as well as a textbook, this book condenses and advances recent scholarship in financial economics. This revised edition corrects the original printing throughout, and updates and clarifies the treatment of a number of important topics."BOOK JACKET
Financial markets and the real economy by John H Cochrane (
file
)
16
editions published
between
2005
and
2008
in
English and Undetermined
and held by
322
libraries
worldwide
The author surveys work on the intersection between macroeconomics and finance. The challenge is to find the right measure of "bad times," rises in the marginal value of wealth, so that we can understand high average returns or low prices as compensation for assets' tendency to pay off poorly in "bad times." The author surveys the literature, covering the timeseries and crosssectional facts, the equity premium, consumptionbased models, general equilibrium models, and labor income/idiosyncratic risk approaches
By force of habit : a consumptionbased explanation of aggregate stock market behavior by John Y Campbell (
Book
)
16
editions published
between
1994
and
1998
in
English
and held by
93
libraries
worldwide
We present a consumptionbased model that explains the procyclical variation of stock prices, the longhorizon predictability of excess stock returns, and the countercyclical variation of stock market volatility. Our model has an i.i.d. consumption growth driving process, and adds a slowmoving external habit to the standard power utility function. The latter feature produces cyclical variation in risk aversion, and hence in the prices of risky assets. Our model also predicts many of the difficulties that beset the standard power utility model, including Euler equation rejections, no correlation between mean consumption growth and interest rates, very high estimates of risk aversion, and pricing errors that are larger than those of the static CAPM. Our model captures much of the history of stock prices, given only consumption data. Since our model captures the equity premium, it implies that fluctuations have important welfare costs. Unlike many habitpersistence models, our model does not necessarily produce cyclical variation in the risk free interest rate, nor does it produce an extremely skewed distribution or negative realizations of the marginal rate of substitution
Longterm debt and optimal policy in the fiscal theory of the price level by John H Cochrane (
Book
)
11
editions published
in
1998
in
English
and held by
92
libraries
worldwide
The fiscal theory says that the price level is determined by the ratio of nominal debt to the present value of real primary surpluses. I analyze longterm debt and optimal policy in the fiscal theory. I find that the maturity structure of the debt matters. For example, it determines whether news of future deficits implies current inflation or future inflation. When long term debt is present, the government can trade current inflation for future inflation by debt operations; this tradeoff is not present if the government rolls over short term debt. I solve for optimal debt policies to minimize the variance of inflation. I find cases in which longterm debt helps to stabilize inflation, and I find that the optimal inflationstabilizing policy produces time series that are surprisingly similar to U.S. surplus and debt time series
New facts in finance by John H Cochrane (
Book
)
10
editions published
in
1999
in
English
and held by
88
libraries
worldwide
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 longterm interest rates reflected expectations of future short term rates and that interest rate differentials across countries reflected expectations of exchangerate depreciation. Now, we see timevarying 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. In this article, I survey these new facts. I show how they are related. Each case uses price variables to infer market expectations of future returns; each case notices that an offsetting adjustment (to dividends, interest rates, or exchange rates) seems to be absent or sluggish. Each case suggests that financial markets offer rewards in the form of average returns for holding risks related to recessions and financial distress, in addition to the risks represented by overall market movements
A frictionless view of U.S. inflation by John H Cochrane (
Book
)
12
editions published
in
1998
in
English
and held by
87
libraries
worldwide
Financial innovation challenges the foundations of monetary theory, and standard monetary theory has not been very successful at describing the history of U.S. inflation. Motivated by these observations, I ask: Can we understand the history of U.S. inflation using a framework that ignores monetary frictions? The fiscal theory of the price level allows us to think about price level determination with no monetary frictions. The price level adjusts to equilibrate the real value of nominal government debt with the present value of surpluses. I describe the theory, and I argue that it is a return to prequantity theoretic ideas in which money is valued via a commodity standard or because the government accepts it to pay taxes. Both sources of value are immune to financial innovation and the presence or absence of monetary frictions. I then interpret the history of U.S. inflation with a fiscaltheory, frictionless view. I show how the fiscal theory can accommodate the stylized fact that deficits and inflation seem to be negatively, not positively correlated. I verify its prediction that open market operations do not affect inflation. I show how debt policy has already smoothed inflation a great deal
Beyond arbitrage : "gooddeal" asset price bounds in incomplete markets by John H Cochrane (
Book
)
10
editions published
between
1996
and
1998
in
English
and held by
81
libraries
worldwide
It is often useful to price assets and other random payoffs by reference to other observed prices rather than construct fullfledged economic asset pricing models. This approach breaks down if one cannot find a perfect replicating portfolio. We impose weak economic restrictions to derive usefully tight bounds on asset prices in this situation. The bounds basically rule out high Sharpe ratios  good deals'  as well as arbitrage opportunities. We present the method of calculation, we extend it to a multiperiod context by finding a recursive solution, and we apply it to option pricing examples including the BlackScholes setup with infrequent trading, and a model with stochastic stock volatility and a varying riskfree rate
Portfolio advice for a multifactor world by John H Cochrane (
Book
)
10
editions published
in
1999
in
English
and held by
80
libraries
worldwide
Asset returns, it turns out, do not follow the Capital Asset Pricing Model, and are somewhat predictable over time. I survey and interpret the large body of recent work that adapts traditional portfolio theory to answer, what should an investor do about these new facts in finance? I survey the extension of the famous 2  fund' theorem to an Nfund'' theorem in which investors either hedge or assume the additional, nonmarket, sources of priced risk; I survey the burgeoning literature on timevarying portfolio rules and the Bayesian literature that advocates a great deal of caution. In a survey, I emphasize the risksharing nature of asset markets, I note the likelihood that many supposed anomalies will not last, and I emphasize the fact that the average investor must hold the market so portfolio decisions must be driven by differences between an investor and the average investor
Where is the market going? : uncertain facts and novel theories by John H Cochrane (
Book
)
10
editions published
between
1997
and
1998
in
English
and held by
80
libraries
worldwide
Will the stock market provide high returns in the future as it has in the past? The average US stock return in the postwar period has been about 8% above treasury bill rates. But that average is poorly measured: The standard confidence interval extends from 3% to 13%. Furthermore, expected returns are low at times such as the present of high prices. Therefore, the statistical evidence suggests a period of low average returns, followed by a slow reversion to a poorly measured long term average. I turn to a detailed survey of economic theory, to see if models that summarize a vast amount of other information shed light on stock returns. Standard models predict nothing like the historical equity premium. After a decade of effort, a range of drastic modifications to the standard model can account for the historical equity premium. It remains to be seen whether the drastic modifications and a high equity premium, or the standard model and a low equity premium, will triumph in the end. Therefore, economic theory gives one reason to fear that average excess returns will not return to 8% after the period of low returns signaled by today's high prices. I conclude with a warning that low average returns does not imply one should change one's portfolio. Someone has to hold the market portfolio; one should only deviate from that norm if one is different from everyone else
Money as stock : price level determination with no money demand by John H Cochrane (
Book
)
11
editions published
between
1999
and
2000
in
English
and held by
77
libraries
worldwide
I show that a determinate, finite price level can be achieved in an economy with no monetary frictions, and no commodity standard or other explicit redemption commitment. I make one small modification to a standard cash in advance model: I reopen the security market at the end of the day. With this modification, overnight money demand is precisely zero. I show that the price level is still determined, however, by the government debt valuation equation. Nominal government debt is, despite appearances, a residual claim to government surpluses. Thus, the price level is determined just like the price of stock, and just as if we used (say) Microsoft stock as numeraire, unit of account, and medium of exchange. I resolve Buiter's (1999) criticism that fiscal price level determination mistreats the government budget constraint. The government is not forced by a budget constraint to raise surpluses in response to an offequilibrium deflation, just as Microsoft is not forced to raise earnings if there is a bubble in its stock price. I also address McCallum's (1998) criticism that fiscal models do not properly treat indeterminacies, and a number of other confusions and misconceptions surrounding fiscal price level determination. I provide a taxonomy of fiscal and monetary regimes
Explaining the poor performance of consumptionbased asset pricing models by John Y Campbell (
Book
)
9
editions published
in
1999
in
English
and held by
76
libraries
worldwide
The poor performance of consumptionbased asset pricing models relative to traditional portfoliobased asset pricing models is one of the great disappointments of the empirical asset pricing literature. We show that the external habitformation model economy of Campbell and Cochrane (1999) can explain this puzzle. Though artificial data from that economy conform to a consumptionbased model by construction, the CAPM and its extensions are much better approximate models than is the standard power utility specification of the consumptionbased model. Conditioning information is the central reason for this result. The model economy has one shock, so when returns are measured at sufficiently high frequency the consumptionbased model and the CAPM are equivalent and perfect conditional asset pricing models. However, the model economy also produces timevarying expected returns, tracked by the dividendprice ratio. Portfoliobased models capture some of this variation in state variables, which a stateindependent function of consumption cannot capture, and so portfoliobased models are better approximate unconditional asset pricing models
Identifying the output effects of monetary policy by John H Cochrane (
Book
)
7
editions published
in
1995
in
English
and held by
76
libraries
worldwide
Stocks as money : convenience yield and the techstock bubble by John H Cochrane (
Book
)
9
editions published
in
2002
in
English
and held by
73
libraries
worldwide
What caused the rise and fall of tech stocks? I argue that a mechanism much like the transactions demand for money drove many stock prices above the 'fundamental value' they would have had in a frictionless market. I start with the Palm/3Com microcosm and then look at tech stocks in general. High prices are associated with high volume, high volatility, low supply of shares, wide dispersion of opinion, and restrictions on longterm short selling. I review competing theories, and only the convenience yield view makes all these connections
Shocks by John H Cochrane (
Book
)
8
editions published
between
1994
and
1995
in
English
and held by
73
libraries
worldwide
What are the shocks that drive economic fluctuations? I examine technology and money shocks in some detail, and briefly review the evidence on oil price and credit shocks. I conclude that none of these popular candidates accounts for the bulk of economic fluctuations. I then examine whether 'consumption shocks, ' news that agents see but we do not, can account for fluctuations. I find that it may be possible to construct models with this feature, though it is more difficult than is commonly realized. If this view is correct, we will forever remain ignorant of the fundamental causes of economic fluctuations
A rehabilitation of stochastic discount factor methodology by John H Cochrane (
Book
)
8
editions published
in
2001
in
English
and held by
72
libraries
worldwide
In a recent Journal of Finance article, Kan and Zhou (1999) find that the 'Stochastic discount factor' methodology using GMM is markedly inferior to traditional maximum likelihood even in a simple test of the static CAPM with i.i.d. normal returns. This result has gained wide attention. However, as Jagannathan and Wang (2001) point out, this result flows from a strange assumption: Kan and Zhou allow the ML estimate to know the mean market return exante. I show how this information advantage explains Kan and Zhou's results. In fact, when treated symmetrically, the discount factor  GMM and traditional methodologies behave almost identically in linear i.i.d. environments
The risk and return of venture capital by John H Cochrane (
Book
)
10
editions published
between
2000
and
2001
in
English
and held by
72
libraries
worldwide
This paper measures the mean, standard deviation, alpha and beta of venture capital investments, using a maximum likelihood estimate that corrects for selection bias. Since firms go public when they have achieved a good return, estimates that do not correct for selection bias are optimistic. The selection bias correction neatly accounts for log returns. Without a selection bias correction, I find a mean log return of about 100% and a log CAPM intercept of about 90%. With the selection bias correction, I find a mean log return of about 7% with a 2% intercept. However, returns are very volatile, with standard deviation near 100%. Therefore, arithmetic average returns and intercepts are much higher than geometric averages. The selection bias correction attenuates but does not eliminate high arithmetic average returns. Without a selection bias correction, I find an arithmetic average return of around 700% and a CAPM alpha of nearly 500%. With the selection bias correction, I find arithmetic average returns of about 53% and CAPM alpha of about 45%. Second, third, and fourth rounds of financing are less risky. They have progressively lower volatility, and therefore lower arithmetic average returns. The betas of successive rounds also decline dramatically from near 1 for the first round to near zero for fourth rounds. The maximum likelihood estimate matches many features of the data, in particular the pattern of IPO and exit as a function of project age, and the fact that return distributions are stable across horizons
The Fed and interest rates : a highfrequency identification by John H Cochrane (
Book
)
10
editions published
in
2002
in
English
and held by
71
libraries
worldwide
We measure monetary policy shocks as changes in the Fed funds target rate that surprise bond markets in daily data. These shock series avoid the omitted variable, timevarying parameter, and orthogonalization problem of monthly VARs, and do not impose the expectations hypothesis. We find surprisingly large and persistent responses of bond yields to these shocks. 10 year rates rise as much as 8/10 of a percent to a one percent target shock. The usual view that monetary policy only temporarily raises long term rates and influences inflation would lead one to predict a negative long rate response
Bond risk premia by John H Cochrane (
Book
)
7
editions published
in
2002
in
English
and held by
71
libraries
worldwide
This paper studies time variation in expected excess bond returns. We run regressions of annual excess returns on forward rates. We find that a single factor predicts 1year excess returns on 15 year maturity bonds with an R2 up to 43%. The single factor is a tentshaped linear function of forward rates. The return forecasting factor has a clear business cycle correlation: Expected returns are high in bad times, and low in good times, and the returnforecasting factor forecasts longrun output growth. The returnforecasting factor also forecasts stock returns, suggesting a common timevarying premium for real interest rate risk. The return forecasting factor is poorly related to level, slope, and curvature movements in bond yields. Therefore, it represents a source of yield curve movement not captured by most term structure models. Though the returnforecasting factor accounts for more than 99% of the timevariation in expected excess bond returns, we find additional, very small factors that forecast equally small differences between long term bond returns, and hence statistically reject a onefactor model for expected returns
International risk sharing is better than you think : or exchange rates are much too smooth by Michael W Brandt (
Book
)
10
editions published
in
2001
in
English
and held by
69
libraries
worldwide
Exchange rates depreciate by the difference between the domestic and foreign marginal utility growths. Exchange rates vary a lot, as much as 10% per year. However, equity premia imply that marginal utility growths vary much more, by at least 50% per year. This means that marginal utility growths must be highly correlated across countries  international risk sharing is better than you think. Conversely, if risks really are not shared internationally, exchange rates should vary more than they do  exchange rates are much too smooth. We calculate an index of international risk sharing that formalizes this intuition in the context of both complete and incomplete capital markets. Our results suggest that risk sharing is indeed very high across several pairs of countries
Financial markets and the real economy by John H Cochrane (
Book
)
6
editions published
in
2005
in
English
and held by
65
libraries
worldwide
"I survey work on the intersection between macroeconomics and finance. The challenge is to find the right measure of marginal utility of wealth, or "bad times" so that we can understand average return premia distilled in finance "factors" as compensation for assets' tendency to pay off badly in "bad times." I survey the equity premium, consumptionbased models, general equilibrium models, and labor income/idiosyncratic risk approaches to this question"National Bureau of Economic Research web site
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Alternative Names
Cochrane, J. R. 1957 Cochrane, John Cochrane, John H. Cochrane, John Howland 1957 Howland Cochrane, John 1957
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