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Augmenting the intertemporal CAPM with inflation: Further evidence from alternative models

Author

Listed:
  • Qi Shi
  • Bin Li

    (Department of Accounting, Finance and Economics, Griffith Business School, Griffith University, Nathan, QLD, Australia)

  • Adrian (Wai Kong) Cheung

    (Department of Finance and Banking, Curtin University, Bentley, WA, Australia)

  • Richard Chung

    (Department of Accounting, Finance and Economics, Griffith Business School, Griffith University, Nathan, QLD, Australia)

Abstract

Studies consistently find that inflation is an important augmented factor for intertemporal capital asset pricing models (ICAPMs) when pricing the Fama–French 25 size and book-to-market portfolios. We extend this line of research by investigating two alternative ICAPM models (from Michel; Hahn and Lee) and the three-factor model from Hou et al. We find significant evidence that both ICAPMs and Hou et al.’s three-factor model perform better when augmented with inflation than the original models. The augmented models achieve a good model fit with the fewest factors, thus avoiding or alleviating the over-fitting problem.

Suggested Citation

  • Qi Shi & Bin Li & Adrian (Wai Kong) Cheung & Richard Chung, 2017. "Augmenting the intertemporal CAPM with inflation: Further evidence from alternative models," Australian Journal of Management, Australian School of Business, vol. 42(4), pages 653-672, November.
    • Handle: RePEc:sae:ausman:v:42:y:2017:i:4:p:653-672
    DOI: 10.1177/0312896216686153
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    References listed on IDEAS

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    1. Ashley Lim & Yihui Lan & Sirimon Treepongkaruna, 2020. "Asset pricing and energy consumption risk," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(4), pages 3813-3850, December.

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    More about this item

    Keywords

    Asset pricing; ICAPM; inflation; over-fitting problem;
    All these keywords.

    JEL classification:

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

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