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A dynamic CAPM with supply effect: Theory and empirical results

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  • Lee, Cheng-Few
  • Tsai, Chiung-Min
  • Lee, Alice C.
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    Abstract

    Breeden [Breeden, D. T. (1979). An intertemporal asset pricing model with stochastic consumption and investment opportunities. Journal of Financial Economics 7, 265-196] and Grinols [Grinols, E. L. (1984). Production and risk leveling in the intertemporal capital asset pricing model. The Journal of Finance 39, 5, 1571-1595] and Cox et al. [Cox, J. C., Ingersoll, J. E., Jr., & Ross, S. A. (1985). An intertemporal general equilibrium model of asset prices. Econometrica 53, 363-384] have described the importance of supply side for the capital asset pricing. Black [Black, S. W. (1976). Rational response to shocks in a dynamic model of capital asset pricing. American Economic Review 66, 767-779] derives a dynamic, multiperiod CAPM, integrating endogenous demand and supply. However, Black's theoretically elegant model has never been empirically tested for its implications in dynamic asset pricing. We first theoretically extend Black's CAPM. Then we use price, dividend per share and earnings per share to test the existence of supply effect with U.S. equity data. We find the supply effect is important in U.S. domestic stock markets. This finding holds as we break the companies listed in the S&P 500 into ten portfolios by different level of payout ratio. It also holds consistently if we use individual stock data.

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    Bibliographic Info

    Article provided by Elsevier in its journal The Quarterly Review of Economics and Finance.

    Volume (Year): 49 (2009)
    Issue (Month): 3 (August)
    Pages: 811-828

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    Handle: RePEc:eee:quaeco:v:49:y:2009:i:3:p:811-828

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    Web page: http://www.elsevier.com/locate/inca/620167

    Related research

    Keywords: CAPM Asset Endogenous supply;

    References

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    1. Campbell, John Y & Grossman, Sanford J & Wang, Jiang, 1993. "Trading Volume and Serial Correlation in Stock Returns," The Quarterly Journal of Economics, MIT Press, vol. 108(4), pages 905-39, November.
    2. Amemiya, Takeshi, 1974. "A Note on a Fair and Jaffee Model," Econometrica, Econometric Society, vol. 42(4), pages 759-62, July.
    3. Breeden, Douglas T., 1979. "An intertemporal asset pricing model with stochastic consumption and investment opportunities," Journal of Financial Economics, Elsevier, vol. 7(3), pages 265-296, September.
    4. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "An Intertemporal General Equilibrium Model of Asset Prices," Econometrica, Econometric Society, vol. 53(2), pages 363-84, March.
    5. Grinols, Earl L, 1984. " Production and Risk Leveling in the Intertemporal Capital Asset Pricing Model," Journal of Finance, American Finance Association, vol. 39(5), pages 1571-95, December.
    6. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
    7. Andrew W. Lo & Jiang W. Wang, 2000. "Trading Volume: Definitions, Data Analysis, and Implications of Portfolio Theory," NBER Working Papers 7625, National Bureau of Economic Research, Inc.
    8. Fair, Ray C & Jaffee, Dwight M, 1972. "Methods of Estimation for Markets in Disequilibrium," Econometrica, Econometric Society, vol. 40(3), pages 497-514, May.
    9. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, 09.
    10. Black, Stanley W, 1976. "Rational Response to Shocks in a Dynamic Model of Capital Asset Pricing," American Economic Review, American Economic Association, vol. 66(5), pages 767-79, December.
    11. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May.
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    Cited by:
    1. Yi-Cheng Shih & Sheng-Syan Chen & Cheng-Few Lee & Po-Jung Chen, 2014. "The evolution of capital asset pricing models," Review of Quantitative Finance and Accounting, Springer, vol. 42(3), pages 415-448, April.

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