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Exploring the Role of Money in Asset Pricing in Japan: Monetary Considerations and Stochastic Discount Factors


  • Baba, Naohiko

    (Institute for Monetary & Econ Studies, Bank of Japan)


As emphasized by Giovannini and Labadie (1991), empirical regularities involving nominal interest rates, asset prices, and inflation should be ultimately determined by money. The role of money, however, is almost neglected, particularly in terms of asset-pricing literature. This paper attempts to investigate the role of money in asset pricing in Japan. Specifically, it compares the empirical performance of stochastic discount factors derived from (i) the standard C-CAPM, (ii) the habit formation model, (iii) the money-in-the-utility model, and (iv) the cash-in-advance model. Empirical results show that in terms of the underlying parameters estimated by Hansen's (1982) Generalized Method of Moments (GMM), the habit formation and the cash-in-advance models are almost always rejected, although no significant difference is found in terms of the volatility bound test among models. The specification test between the standard C-CAPM and the money-in-the-utility model generally favors the latter, implying that there is a positive role of money in specifying the stochastic discount factor.

Suggested Citation

  • Baba, Naohiko, 2000. "Exploring the Role of Money in Asset Pricing in Japan: Monetary Considerations and Stochastic Discount Factors," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 18(2), pages 159-198, December.
  • Handle: RePEc:ime:imemes:v:18:y:2000:i:2:p:159-198

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    Cited by:

    1. Hideaki Tamura & Yoichi Matsuabayashi, 2016. "Alternative Resolution to the Mehra?Prescott Puzzle: Verification by the Original Data," Discussion Papers 1634, Graduate School of Economics, Kobe University.
    2. repec:kob:wpaper:1634 is not listed on IDEAS

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates


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