Embedded Files
I. Pricing Factors and Mispricing
I. Pricing Factors and Mispricing
Lee, W. (2026): Chapter 1, Out of the APT Shadow, pp. 5–23. [PDF]
Lee, W. (2026): Chapter 2, Shifting toward a Micro ICAPM, pp. 25–35. [PDF]
Lee, W. (2026): Chapter 3, Dealing with Factor Mismeasurement, pp. 37–48. [PDF]
Lee, W. (2026): Chapter 4, Informational Limits behind the Puzzle, pp. 49–59. [PDF]
Lee, W. (2026): Chapter 5, An Algorithmic Multifactor Extension, pp. 61–74. [PDF]
Lee, W. (2026): Chapter 6, Between Multifactor and Multi-Beta, pp. 75–84. [PDF]
Lee, W. (2026): Chapter 7, Arbitrage-Induced Mispricing, pp. 85–94. [PDF]
II. Dynamics of Asset Prices
II. Dynamics of Asset Prices
Lee, W. (2026): Chapter 8, Exact Linear Present Value, pp. 97–112. [PDF]
Lee, W. (2026): Chapter 9, Speculation-Based Asset Pricing, pp. 113–124. [PDF]
Lee, W. (2026): Chapter 10, Chaotic Dynamics of Asset Prices, pp. 125–135. [PDF]
Lee, W. (2026): Chapter 11, Intertemporal Dynamics of Asset Prices, pp. 137–148. [PDF]
Lee, W. (2026): Chapter 12, Dual Momentum: Cash Flows and Discount Rates, pp. 149–162. [PDF]
Lee, W. (2026): Chapter 13, Dual Exposure: Systematic and Systemic Risk, pp. 163–181. [PDF]
Lee, W. (2026): Chapter 14, Price Dynamics and Investor Mobility, pp. 183–197. [PDF]
III. Active Investing through Asset Pricing
III. Active Investing through Asset Pricing
Lee, W. (2026): Chapter 15, Predictability in Strategic Asset Allocation, pp. 201–214. [PDF]
Lee, W. (2026): Chapter 16, Fund Manager Beta in Tactical Asset Allocation, pp. 215–225. [PDF]
Lee, W. (2026): Chapter 17, Fund Manager Alpha in Tactical Asset Allocation, pp. 227–235. [PDF]
Lee, W. (2026): Chapter 18, Performance Measures and Mean-Variance Efficiency, pp. 237–254. [PDF]
IV. Corporate Finance through Asset Pricing
IV. Corporate Finance through Asset Pricing
Lee, W. (2026): Chapter 19, From Business Accounting to Market Valuations, pp. 257–274. [PDF]
Lee, W. (2026): Chapter 20, A General Framework for Tax Shield Valuation, pp. 275–297. [PDF]
Lee, W. (2026): Chapter 21, A General Framework for Equity Valuation, pp. 299–314. [PDF]
Lee, W. (2026): Chapter 22, Firm Optimization across Capital Forms, pp. 315–333. [PDF]
V. Economics through Asset Pricing
V. Economics through Asset Pricing
The Research Volume
The Research Volume
Lee, W. (2026): New Ideas in Financial Economics: 25 Theoretical Proposals, private edition, Seoul, South Korea, xxi, 392 pp. [Preview PDF]
The research volume was finalized in June 2026, and copies of the private edition have since been presented to selected recipients.
Research Contributions
Research Contributions
Examines the economic justification and statistical validity of standard factor models, including the Fama-French three-factor model, from five perspectives. (Chapters 1, 2, 3, 5, and 6)
Reinterprets the equity premium puzzle as arising from an information gap between researchers as observers and consumers as agents, and proposes a solution to the puzzle. (Chapter 4)
Challenges the traditional view that arbitrageurs pursue profit opportunities by acting as counterparties to mean-variance optimizers. (Chapter 7)
Reformulates the Campbell-Shiller method, a core methodology in asset pricing theory, without loglinear approximation and proposes a non-logarithmic, non-approximate, linear alternative. (Chapter 8)
Reframes conventional asset pricing theory around speculative beliefs and return forecasting rather than risk and discounting, and introduces a price-bubble indicator and the concept of a boost ticket. (Chapter 9)
Introduces chaos theory into asset pricing and develops a market-regime indicator that can be measured using market prices alone. The indicator closely aligns with NBER recession dates, which are determined ex post. (Chapter 10)
Refines the theory of asset-price dynamics and, on this basis, extends the empirical framework for analyzing momentum and risk exposures. (Chapters 11, 12, and 13)
Integrates market microstructure, investor heterogeneity, institutional trading, analyst forecast dispersion, and short-sale constraints into a unified mathematical framework, and establishes the concept of investor mobility. (Chapter 14)
Extends the standard mean-variance framework into a mean-variance-predictability framework and presents benchmark optimization as an extension of portfolio optimization. (Chapter 15)
Provides a theoretical foundation for active investment strategies and extends the analytical framework for evaluating manager skill and fund performance. (Chapters 16, 17, and 18)
Reconstructs business accounting for direct compatibility with asset pricing theory and formalizes the accounting link between corporate activities and market-value formation. (Chapter 19)
Resolves the long-standing valuation issue surrounding tax shields arising from interest expense. (Chapter 20)
Integrates the dividend discount model, the residual income model, the Campbell-Shiller present value model, the Fama-French five-factor model, the redundancy of the value factor, and long-term return reversal into a unified mathematical framework. (Chapter 21)
Derives optimal decision rules for physical capital, human capital, equity capital, and debt capital, and presents production-based and profit-based asset pricing frameworks. (Chapter 22)
Reconstructs national accounting for direct compatibility with asset pricing theory and analyzes sectoral activities and financial flows among households, firms, the government, and the foreign sector through accounting identities. Within the same framework, it examines the effects of central bank money issuance and reinterprets Modern Monetary Theory. (Chapter 23)
Proposes a potential solution to the identification limitations of the neoclassical aggregate production function and reinterprets the causal relationships and policy implications of the Keynesian consumption function and multiplier. (Chapter 24)
Analyzes the logic of demand-side price setting, distinguishes it from supply-side price setting such as open market operations, and presents the strategic interaction between price setters and price takers through four types of games. (Chapter 25)
Volume Contents
Volume Contents
Overview
Part I, “Pricing Factors and Mispricing,” comprises seven chapters.
• Chapter 1 distinguishes equilibrium pricing from arbitrage pricing in a factor model.
• Chapter 2 introduces a micro ICAPM using asset-specific proxies for state variables.
• Chapter 3 identifies risk premium estimate biases caused by factor mismeasurement.
• Chapter 4 shows how consumer predictive ability resolves the equity premium puzzle.
• Chapter 5 reveals the multifactor extension algorithm behind anomaly-based models.
• Chapter 6 investigates whether multifactor models are a multi-beta CAPM in disguise.
• Chapter 7 examines mispricing from aligned strategies of arbitrageurs and optimizers.
Part II, “Dynamics of Asset Prices,” comprises seven chapters.
• Chapter 8 develops a level-based present value framework replacing loglinearization.
• Chapter 9 presents an asset pricing framework shifting focus from risk to speculation.
• Chapter 10 reinterprets price dynamics as predictive, adjusting, and chaotic behavior.
• Chapter 11 develops an integrated framework for intertemporal asset price dynamics.
• Chapter 12 reframes momentum as persistence in cash-flow and discount-rate news.
• Chapter 13 decomposes systemic risk into market and market-orthogonal exposures.
• Chapter 14 explains price dynamics via three channels and defines investor mobility.
Part III, “Active Investing through Asset Pricing,” comprises four chapters.
• Chapter 15 extends portfolio theory beyond mean-variance to include predictability.
• Chapter 16 specifies separate manager betas for ordinary and superior market timing.
• Chapter 17 specifies separate manager alphas for ordinary and superior stock picking.
• Chapter 18 unifies diverse performance measures through mean-variance efficiency.
Part IV, “Corporate Finance through Asset Pricing,” comprises four chapters.
• Chapter 19 connects business accounting to the market valuation of equity and debt.
• Chapter 20 derives consistent valuations for the tax shield and all other capital forms.
• Chapter 21 formulates a structural basis for unifying diverse equity valuation models.
• Chapter 22 examines firm optimization under endogenous or exogenous profitability.
Part V, “Economics through Asset Pricing,” comprises three chapters.
• Chapter 23 builds a comprehensive framework that captures macroeconomic flows.
• Chapter 24 develops a theory of value conversion and a revised account of causality.
• Chapter 25 develops a theory of strategic equilibrium among price setters and takers.
Table of Contents
Chapter 1. Out of the APT Shadow
1.1 Understanding Factor Structures
1.1.1 Axiomatic Factor Structures
1.1.2 Equilibrium Factor Structures
1.1.3 Arbitrage Factor Structures
1.2 Beyond the APT
1.2.1 Theoretical Analysis
1.2.2 Empirical Analysis
Chapter 2. Shifting toward a Micro ICAPM
2.1 Assumed Nature of Investment Opportunities
2.1.1 Deterministic Investment Opportunities
2.1.2 Stochastic Investment Opportunities
2.2 Empirical Approaches to the ICAPM
2.2.1 Macro-Level Approach
2.2.2 Micro-Level Approach
Chapter 3. Dealing with Factor Mismeasurement
3.1 Empirical Proxies for Theoretical Factors
3.2 Bias from Factor Mismeasurement
3.2.1 Theoretical Analysis
3.2.2 Empirical Analysis
Chapter 4. Informational Limits behind the Puzzle
4.1 Expectation-Based Satisfaction
4.2 Predictive Ability of Consumers
4.2.1 Stochastic Discount Factor
4.2.2 Information Sets and Inequalities
4.2.3 Resolving the Equity Premium Puzzle
Chapter 5. An Algorithmic Multifactor Extension
5.1 Algorithm for Multifactor Models
5.1.1 Constructing an Incremental Factor
5.1.2 Iterative Multifactor Extension
5.2 NIPALS Algorithm for PLS Models
Chapter 6. Between Multifactor and Multi-Beta
6.1 Covariance Structures with Characteristics
6.2 Recasting Multifactor as Multi-Beta
Chapter 7. Arbitrage-Induced Mispricing
7.1 Quantitative Positioning Inputs
7.1.1 Positioning Inputs for Arbitrageurs
7.1.2 Positioning Inputs for Optimizers
7.2 Strategic Equivalence and Mispricing
Chapter 8. Exact Linear Present Value
8.1 Present Value Formulations
8.1.1 Approximate Formulation in Logs
8.1.2 Exact Formulation in Levels
8.2 VAR-Based Analysis of Price Dynamics
8.2.1 Anticipated Price Changes
8.2.2 Price Innovations
Chapter 9. Speculation-Based Asset Pricing
9.1 Forecasting Regressions in Asset Pricing
9.1.1 Pooled Forecasting Regressions
9.1.2 Asset-Specific Forecasting Regressions
9.2 Implications of Speculation-Based Asset Pricing
9.2.1 Laws of Motion and Bubble Dominance
9.2.2 Intertemporal Tradeoff in Returns
Chapter 10. Chaotic Dynamics of Asset Prices
10.1 Three Models of Price Dynamics
10.1.1 Model I: Predictive Content
10.1.2 Model II: Partial Adjustment
10.1.3 Model III: Chaotic Growth
10.2 Detecting Regime Shifts
Chapter 11. Intertemporal Dynamics of Asset Prices
11.1 Information Processing
11.2 Pricing and Repricing
11.3 Intertemporal Asset Pricing
Chapter 12. Dual Momentum: Cash Flows and Discount Rates
12.1 Cash-Flow and Discount-Rate Momentum
12.2 Empirical Investigations
12.2.1 Event-Time Analysis of Dual Momentum
12.2.2 Strategies Based on Abnormal Returns
12.2.3 Strategies Based on Conditional Betas
Chapter 13. Dual Exposure: Systematic and Systemic Risk
13.1 Dual Exposure and Risk Components
13.1.1 Systemic Risk Measures
13.1.2 Beyond Single Exposure
13.1.3 Net Systemic Risk Measures
13.2 Empirical Investigations
13.2.1 Contemporaneous Relations
13.2.2 Intertemporal Relations
Chapter 14. Price Dynamics and Investor Mobility
14.1 Equilibrium with Heterogeneous Beliefs
14.1.1 Equilibrium Price from Market Clearing
14.1.2 Probability Measure over Forecast Groups
14.2 Three Representations of Price Dynamics
14.2.1 Representation I: Group Dominance
14.2.2 Representation II: Order Imbalance
14.2.3 Representation III: Participation Tilt
14.3 Implied Investor Mobility and Illiquidity
Chapter 15. Predictability in Strategic Asset Allocation
15.1 A Framework for Strategic Asset Allocation
15.2 Beyond Mean-Variance
15.2.1 Benchmark Choice Problem
15.2.2 Implications for Asset Pricing
15.2.3 Active Efficient Frontier
Chapter 16. Fund Manager Beta in Tactical Asset Allocation
16.1 A Framework for Tactical Asset Allocation
16.2 Superior Market Timing Ability
16.2.1 Theoretical Analysis
16.2.2 Empirical Analysis
Chapter 17. Fund Manager Alpha in Tactical Asset Allocation
17.1 Stock Picking in Tactical Asset Allocation
17.2 Superior Stock Picking Ability
17.2.1 Theoretical Analysis
17.2.2 Empirical Analysis
Chapter 18. Performance Measures and Mean-Variance Efficiency
18.1 Performance Measures
18.2 Benchmark-Relative Metrics
Chapter 19. From Business Accounting to Market Valuations
19.1 Accounting Variables
19.1.1 Balance Sheet Variables
19.1.2 Income Statement Variables
19.1.3 Cash Flow Statement Variables
19.2 Cash Flows and Market Valuations
Chapter 20. A General Framework for Tax Shield Valuation
20.1 Fundamental Constructs
20.1.1 Accounting Variables
20.1.2 Cost of Capital by Capital Form
20.2 General Approaches to Valuation
20.2.1 Constant Discount Rate Approach
20.2.2 Stochastic Discount Factor Approach
20.3 Valuation under Specific Settings
20.3.1 Risk-Free Debt Assumption
20.3.2 Modigliani-Miller Setting
20.3.3 Miles-Ezzell Setting
Chapter 21. A General Framework for Equity Valuation
21.1 Equity-Related Variables
21.2 Equity Valuation Models
21.2.1 Fundamental Identities
21.2.2 Fixed-Expectations Models
21.2.3 Revising-Expectations Models
Chapter 22. Firm Optimization across Capital Forms
22.1 Production-Related Variables
22.2 Asset Pricing across Profitability Roles
22.2.1 Production-Based Asset Pricing
22.2.2 Profit-Based Asset Pricing
Chapter 23. From National Accounting to Macroeconomic Flows
23.1 A Macroeconomic Framework
23.1.1 Financial Markets
23.1.2 Household and Business Sectors
23.1.3 Government and Foreign Sectors
23.2 Implications of Money Creation
23.2.1 Sectoral Balance Identity
23.2.2 Total Value Identity
23.2.3 Modern Money Theory
Chapter 24. A Macroeconomic Theory of Value Conversion
24.1 Fundamental Constructs
24.2 Economics of Value Conversion
24.2.1 Causality on the Production Side
24.2.2 Causality on the Consumption Side
Chapter 25. Price Setting, Free Riding, and Equilibrium
25.1 Equilibrium across Strategy Profiles
25.1.1 A Two-Investor Example
25.1.2 A Three-Investor Example
25.2 Strategic Interaction and Game Types
List of Figures
Figure 1.1. Axiomatic Pricing
Figure 1.2. Equilibrium Pricing
Figure 1.3. Equilibrium Pricing: Specializations
Figure 1.4. Arbitrage Pricing
Figure 2.1. Two Diagrams of Investment Opportunities
Figure 5.1. Path Diagrams of the PLS and the Multifactor Model
Figure 8.1. Anticipated Price Changes: 1967–2022
Figure 8.2. Price Innovations: 1967–2022
Figure 9.1. Bitcoin Price Decomposition: Jan 2014–Dec 2022
Figure 10.1. Cobweb Diagrams of the Logistic Map
Figure 10.2. Historical Log Price and Transformations: 1967–2022
Figure 10.3. Chaotic Behavior in Price Dynamics: 1967–2022
Figure 12.1. Overlapping Portfolios with a Six-Month Holding Period
Figure 13.1. Risk Components in the Financial Sector
Figure 13.2. Historical Returns and Risk Measures: Jan 2006–Dec 2008
Figure 14.1. Historical Investor Mobility and Illiquidity: 1967–2022
Figure 15.1. Active Efficient Frontier in Two Dimensions: 1967–2022
Figure 15.2. Active Efficient Frontier in Three Dimensions: 1967–2022
Figure 19.1. Income Statement Variables and Extensions
Figure 19.2. Standard versus Modified Cash Flow Statement
Figure 19.3. Accounting Variables, Cash Flows, and Market Valuations
Figure 21.1. Dynamic Interactions among Equity Variables
List of Tables
Table 1.1. Evidence of Strong Factor Structures: 1967–2022
Table 1.2. Fama-MacBeth Regressions: 1967–2022
Table 2.1. Fama-MacBeth Regressions: 1967–2022
Table 3.1. Fama-MacBeth Regressions: 1967–2022
Table 6.1. Covariance Captured by a Multi-Beta CAPM: 1967–2022
Table 7.1. Sorts on Positioning Inputs: 1967–2022
Table 7.2. Fama-MacBeth Regressions: 1967–2022
Table 8.1. Estimates of the VAR in First Differences: 1967–2022
Table 8.2. Contributions to Anticipated Price Changes: 1967–2022
Table 8.3. Estimates of the VAR in Levels: 1967–2022
Table 8.4. Contributions to Price Innovations: 1967–2022
Table 12.1. Event-Time Performance of Momentum Portfolios: 1967–2022
Table 12.2. Strategies Based on Abnormal Returns: 1967–2022
Table 12.3. Strategies Based on Conditional Betas: 1967–2022
Table 13.1. Contemporaneous Relations by Period: Jan 2006–Dec 2008
Table 13.2. Intertemporal Relations by Period: Jan 2006–Dec 2008
Table 16.1. Manager Abilities by Dimension: 2008–2022
Table 17.1. Fama-MacBeth Regressions: 2008–2022
Table 17.2. Stock Picking Ability by Fund Style: 2008–2022
Table 18.1. Benchmark-Relative Performance by Region: 2008–2022
Table 25.1. Equilibrium Outcomes in a Two-Investor Market
Table 25.2. Equilibrium Outcomes in a Three-Investor Market
Table 25.3. Payoffs Augmented with Psychological Components
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