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Equilibrium Cross Section of Returns

Author Info

  • Joao Gomes
  • Leonid Kogan
  • Lu Zhang

Abstract

We construct a dynamic general equilibrium production economy to explicitly link expected stock returns to firm characteristics such as firm size and the book-to-market ratio. Stock returns in the model are completely characterized by a conditional capital asset pricing model (CAPM). Size and book-to-market are correlated with the true conditional market beta and therefore appear to predict stock returns. The cross-sectional relations between firm characteristics and returns can subsist even after one controls for typical empirical estimates of beta. These findings suggest that the empirical success of size and book-to-market can be consistent with a single-factor conditional CAPM model.

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File URL: http://dx.doi.org/10.1086/375379
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Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 111 (2003)
Issue (Month): 4 (August)
Pages: 693-732

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Handle: RePEc:ucp:jpolec:v:111:y:2003:i:4:p:693-732
Contact details of provider: Web page: http://www.journals.uchicago.edu/JPE/

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Find related papers by JEL classification:
  • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
  • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
  • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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