Research Volume

About the Author

Woongki Lee is a researcher based in South Korea. He earned a Ph.D. in Finance from Korea University after studying economics at Inha University. His research focuses on developing new theoretical frameworks in asset pricing, investment theory, corporate finance, macroeconomics, and econometrics.

Lee seeks to produce original research in economics and finance with the potential to make a meaningful scholarly contribution. This aim has shaped his independent research path, giving his work a strong sense of focus and persistence despite the challenges involved. His intellectual temperament may be broadly characterized by traits associated with the 3w4 Enneagram type, the 358 tritype, and the INTP-A profile, including analytical independence, strategic persistence, introspective ambition, and a sustained preference for original conceptual work. Lee was born in South Korea on July 1, 1987.

Volume Structure

Part I, “Pricing Factors and Mispricing,” contains 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,” contains 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,” contains 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,” contains 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,” contains 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.

Scope and 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, 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 seek 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 theory and develops a market regime indicator that can be measured using market prices alone. This indicator closely aligns with NBER recession dates, which are identified 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, 13)

 • Integrates market microstructure, investor heterogeneity, institutional trading, analyst forecast dispersion, and short-sale constraints into a single 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 extended form 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, 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 interest expense tax shields. (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 single 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 limits of the neoclassical aggregate production function and reinterprets the causal relations and policy implications of the Keynesian consumption function and multiplier. (Chapter 24)

 • Analyzes the logic of demand-side price setting, distinguished from supply-side price setting such as open market operations, and presents the strategic interaction between price setters and price takers through four game types. (Chapter 25)

Table of Contents

PART I: Pricing Factors and Mispricing

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

PART II: Dynamics of Asset Prices

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

PART III: Active Investing through Asset Pricing

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

PART IV: Corporate Finance through Asset Pricing

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

PART V: Economics through 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