This paper develops and estimates a heteroskedastic variant of Campbell’s (1993) ICAPM, in which risk factors include a stock market return and variables forecasting stock market returns or variance. Our main innovation is the use of a new set of predictive variables, which not only have superior forecasting abilities for stock returns and variance, but also are theoretically motivated. In contrast with the early authors, we find that Campbell’s ICAPM performs significantly better than the CAPM. That is, the additional factors account for a substantial portion of the two CAPM-related anomalies, namely, the value premium and the momentum profit.
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Publisher Info
Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number
2002-013.
Length: Date of creation: 2005 Date of revision: Publication status: Published in Journal of Banking and Finance, July 2006, 30(7), pp. 2087-2107 Handle: RePEc:fip:fedlwp:2002-013
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