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An Investment-Growth Asset Pricing Model

Author

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  • Li, Qing
  • Vassalou, Maria
  • Xing, Yuhang

Abstract

In this paper we present a simple model where asset returns are functions of multiple investment growth rates. The model is tested for its ability to price the 25 Fama-French portfolios using the Generalized Methods of Moments (GMM) methodology, as well as Fama-MacBeth cross-sectional regressions. Comparisons on the basis of several metrics with other models, such as the CAPM, the Fama-French (1993) model and Cochrane's (1996) model, reveal that it consistently outperforms the CAPM and Cochrane's model. It also outperforms the Fama-French model in several tests. Our model can explain a significantly larger proportion of the cross-sectional variation in the 25 Fama-French portfolios than the Fama-French model does. Specification tests in the context of GMM and the Fama-MacBeth regressions show that in the presence of the investment growth factors included in our model, the size and book-to-market characteristics lose their ability to explain asset returns. Our model is successful in pricing size- and book-to-market- sorted portfolios, although it includes exclusively macroeconomic variables as factors.

Suggested Citation

  • Li, Qing & Vassalou, Maria & Xing, Yuhang, 2001. "An Investment-Growth Asset Pricing Model," CEPR Discussion Papers 3058, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:3058
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Alan Gregory & Richard D.F. Harris & Maria Michou, 2003. "Contrarian Investment and Macroeconomic Risk," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(1-2), pages 213-256.
    2. João F. Gomes & Amir Yaron & Lu Zhang, 2006. "Asset Pricing Implications of Firms' Financing Constraints," Review of Financial Studies, Society for Financial Studies, vol. 19(4), pages 1321-1356.
    3. Gibran Watfe, 2015. "The Impact of the ECB's Asset Purchase Programmes on Sovereign Bond Spreads in the Euro Area," Bruges European Economic Research Papers 35, European Economic Studies Department, College of Europe.
    4. Schrimpf, Andreas & Schröder, Michael & Stehle, Richard, 2006. "Evaluating conditional asset pricing models for the German stock market," ZEW Discussion Papers 06-043, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    5. H. Youn Kim, 2003. "Intertemporal production and asset pricing: a duality approach," Oxford Economic Papers, Oxford University Press, vol. 55(2), pages 344-379, April.

    More about this item

    Keywords

    GMM;

    JEL classification:

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

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