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Long-term perspective on the stock market matters in asset pricing

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  • Park, Heungju
  • Sohn, Bumjean

Abstract

We provide a more intuitive interpretation of Campbell's (1993) intertemporal capital asset pricing model. In this model, investors’ long-term perspective on the stock market matters and the revision on the perspective becomes a pricing factor. We construct this factor series from out-of-sample forecasts and it allows us to avoid the perfect foresight problem of the VAR factor model and to deal with on-going debate on the return predictability. Our empirical results suggest that the innovation factor is strongly and robustly priced across assets and has close relationship with the momentum and liquidity factors.

Suggested Citation

  • Park, Heungju & Sohn, Bumjean, 2016. "Long-term perspective on the stock market matters in asset pricing," Finance Research Letters, Elsevier, vol. 16(C), pages 162-170.
    • Handle: RePEc:eee:finlet:v:16:y:2016:i:c:p:162-170
    DOI: 10.1016/j.frl.2015.10.022
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    References listed on IDEAS

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    More about this item

    Keywords

    ICAPM; Cross-section of equity returns; Long-horizon market return;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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