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Production-based measures of risk for asset pricing

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  • Belo, Frederico

Abstract

A stochastic discount factor for asset returns is recovered from equilibrium marginal rates of transformation inferred from producers' first-order conditions. The marginal rate of transformation implies a novel macro-factor asset pricing model that does a reasonable job explaining the cross-sectional variation in average stock returns with plausible parameter values. Using a flexible representation of firms' production technology, producers' ability to transform output across states of nature is estimated to be high, in contrast with what is typically assumed in standard aggregate representations of firms' production technology.

Suggested Citation

  • Belo, Frederico, 2010. "Production-based measures of risk for asset pricing," Journal of Monetary Economics, Elsevier, vol. 57(2), pages 146-163, March.
  • Handle: RePEc:eee:moneco:v:57:y:2010:i:2:p:146-163
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    Citations

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    Cited by:

    1. Lin, Xiaoji, 2012. "Endogenous technological progress and the cross-section of stock returns," Journal of Financial Economics, Elsevier, vol. 103(2), pages 411-427.
    2. Urban Jermann, 2013. "A Production-Based Model for the Term Structure," NBER Working Papers 18774, National Bureau of Economic Research, Inc.
    3. Fukuta, Yuichi & Yamane, Akiko, 2015. "Value premium and implied equity duration in the Japanese stock market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 39(C), pages 102-121.
    4. Stefan Nagel, 2013. "Empirical Cross-Sectional Asset Pricing," Annual Review of Financial Economics, Annual Reviews, vol. 5(1), pages 167-199, November.
    5. Pithak Srisuksai & Vimut Vanitcharearntham, 2016. "Asset Pricing with Idiosyncratic Shocks," Applied Economics Journal, Kasetsart University, Faculty of Economics, Center for Applied Economic Research, vol. 23(1), pages 35-58, June.
    6. Jermann, Urban J., 2010. "The equity premium implied by production," Journal of Financial Economics, Elsevier, vol. 98(2), pages 279-296, November.
    7. Xiaoji Lin & Fan Yang & Frederico Belo, 2014. "External Equity Financing Costs, Financial Flows, and Asset Prices," 2014 Meeting Papers 863, Society for Economic Dynamics.
    8. Shen, Junyan & Yu, Jianfeng & Zhao, Shen, 2017. "Investor sentiment and economic forces," Journal of Monetary Economics, Elsevier, vol. 86(C), pages 1-21.
    9. Lin, Xiaoji & Zhang, Lu, 2013. "The investment manifesto," Journal of Monetary Economics, Elsevier, vol. 60(3), pages 351-366.
    10. Gourio, François, 2011. "Putty-clay technology and stock market volatility," Journal of Monetary Economics, Elsevier, vol. 58(2), pages 117-131, March.
    11. Lu Zhang, 2017. "The Investment CAPM," NBER Working Papers 23226, National Bureau of Economic Research, Inc.
    12. Liu, Laura Xiaolei & Zhang, Lu, 2014. "A neoclassical interpretation of momentum," Journal of Monetary Economics, Elsevier, vol. 67(C), pages 109-128.
    13. Jermann, Urban J., 2013. "A production-based model for the term structure," Journal of Financial Economics, Elsevier, vol. 109(2), pages 293-306.
    14. Pierlauro Lopez, 2018. "A New Keynesian Q Theory and the Link Between Inflation and the Stock Market," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 29, pages 85-105, July.
    15. Andrei S. Gonçalves & Chen Xue & Lu Zhang, 2017. "Does the Investment Model Explain Value and Momentum Simultaneously?," NBER Working Papers 23910, National Bureau of Economic Research, Inc.
    16. Roberto Steri, 2015. "Collateral-Based Asset Pricing," 2015 Meeting Papers 293, Society for Economic Dynamics.
    17. Xiaoji Lin & Lu Zhang, 2011. "Covariances versus Characteristics in General Equilibrium," NBER Working Papers 17285, National Bureau of Economic Research, Inc.
    18. Frederico Belo & Chen Xue & Lu Zhang, 2013. "A Supply Approach to Valuation," Review of Financial Studies, Society for Financial Studies, vol. 26(12), pages 3029-3067.

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