IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Productivity-Based Asset Pricing: Theory and Evidence

  • Ronald J. Balvers

    (Division of Economics and Finance, West Virginia University)

  • Dayong Huang

    (Division of Economics and Finance, West Virginia University)

This paper considers asset pricing from the production side. It differs from earlier approaches to production-based asset pricing in that the pricing kernel is derived by replacing the marginal rate of intertemporal substitution with an amended version of the marginal rate of intertemporal transformation in a complete markets economy. Relying on a general version of the traditional Real Business Cycle macro model we find that the variables determining the mean returns of all financial assets are the productivity shock as the sole factor together with the capital stock and lagged Solow residual (productivity level) as conditioning variables. Standard GMM estimation finds that our model improves on the complementary consumption-based and market-based approaches and is competitive with the Fama-French three-factor model. The model explains the size premium from differences in the unconditional sensitivity to productivity shocks—small firms are more sensitive to productivity shocks—and explains the value premium from differences in the conditional sensitivity to productivity shocks—growth stocks are more sensitive to productivity shocks in good states when the risk premium is low.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://be.wvu.edu/phd_economics/pdf/05-05.pdf
File Function: First version, 2005
Download Restriction: no

Paper provided by Department of Economics, West Virginia University in its series Working Papers with number 05-05 Classification- JEL: G12; E44.

as
in new window

Length: 45 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:wvu:wpaper:05-05
Contact details of provider: Postal: P.O. Box 6025, Morgantown, WV 26506-6025
Phone: (304) 293-7859
Fax: (304) 293-2233
Web page: http://be.wvu.edu/phd_economics/
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
  2. Campbell, John Y, 1993. "Intertemporal Asset Pricing without Consumption Data," American Economic Review, American Economic Association, vol. 83(3), pages 487-512, June.
  3. Campbell, John, 1996. "Understanding Risk and Return," Scholarly Articles 3153293, Harvard University Department of Economics.
  4. John Y. Campbell & John H. Cochrane, 1994. "By force of habit: a consumption-based explanation of aggregate stock market behavior," Working Papers 94-17, Federal Reserve Bank of Philadelphia.
  5. Balvers, Ronald J. & Huang, Dayong, 2009. "Evaluation of linear asset pricing models by implied portfolio performance," Journal of Banking & Finance, Elsevier, vol. 33(9), pages 1586-1596, September.
  6. Constantinides, George M & Duffie, Darrell, 1996. "Asset Pricing with Heterogeneous Consumers," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 219-40, April.
  7. Cochrane, John H, 1996. "A Cross-Sectional Test of an Investment-Based Asset Pricing Model," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 572-621, June.
  8. Monika Piazzesi & Martin Schneider & Selale Tuzel, 2004. "Housing, Consumption and Asset Pricing," 2004 Meeting Papers 357c, Society for Economic Dynamics.
  9. Thomas Tallarini & Harold Zhang, . "External Habit and the Cyclicality of Expected Stock Returns," GSIA Working Papers 1997-26, Carnegie Mellon University, Tepper School of Business.
  10. Paul Harrison & Harold H. Zhang, 1999. "An Investigation Of The Risk And Return Relation At Long Horizons," The Review of Economics and Statistics, MIT Press, vol. 81(3), pages 399-408, August.
  11. Hodrick, Robert J. & Zhang, Xiaoyan, 2001. "Evaluating the specification errors of asset pricing models," Journal of Financial Economics, Elsevier, vol. 62(2), pages 327-376, November.
  12. King, Robert G. & Plosser, Charles I. & Stock, James H. & Watson, Mark W., 1991. "Stochastic Trends and Economic Fluctuations," American Economic Review, American Economic Association, vol. 81(4), pages 819-40, September.
  13. Tano Santos & Pietro Veronesi, 2006. "Labor Income and Predictable Stock Returns," Review of Financial Studies, Society for Financial Studies, vol. 19(1), pages 1-44.
  14. Jonathan A. Parker & Christian Julliard, 2005. "Consumption Risk and the Cross Section of Expected Returns," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 185-222, February.
  15. Urban J. Jermann, 2005. "The Equity Premium Implied by Production," 2005 Meeting Papers 630, Society for Economic Dynamics.
  16. Matthew D. Shapiro & N. Gregory Mankiw, 1985. "Risk and Return: Consumption Beta Versus Market Beta," Cowles Foundation Discussion Papers 738, Cowles Foundation for Research in Economics, Yale University.
  17. Joseph G. Altonji & Lewis M. Segal, 1994. "Small Sample Bias in GMM Estimation of Covariance Structures," NBER Technical Working Papers 0156, National Bureau of Economic Research, Inc.
  18. Ravi Jagannathan & Zhenyu Wang, 2002. "Empirical Evaluation of Asset-Pricing Models: A Comparison of the SDF and Beta Methods," Journal of Finance, American Finance Association, vol. 57(5), pages 2337-2367, October.
  19. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-36, May-June.
  20. Cochrane, John H., 2005. "Financial Markets and the Real Economy," Foundations and Trends(R) in Finance, now publishers, vol. 1(1), pages 1-101, July.
  21. 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.
  22. John Y. Campbell & John H. Cochrane, 2000. "Explaining the Poor Performance of Consumption-based Asset Pricing Models," Journal of Finance, American Finance Association, vol. 55(6), pages 2863-2878, December.
  23. Lars Peter Hansen & Ravi Jagannathan, 1994. "Assessing specification errors in stochastic discount factor models," Staff Report 167, Federal Reserve Bank of Minneapolis.
  24. Michele Boldrin & Lawrence J. Christiano & Jonas D.M. Fisher, 1999. "Habit persistence, asset returns and the business cycles," Working Paper Series WP-99-14, Federal Reserve Bank of Chicago.
  25. Andrew B. Abel, 1990. "Asset Prices under Habit Formation and Catching up with the Joneses," NBER Working Papers 3279, National Bureau of Economic Research, Inc.
  26. Hodrick, Robert J, 1992. "Dividend Yields and Expected Stock Returns: Alternative Procedures for Inference and Measurement," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 357-86.
  27. G. Constantinides, 1990. "Habit formation: a resolution of the equity premium puzzle," Levine's Working Paper Archive 1397, David K. Levine.
  28. Joao Gomes & Leonid Kogan & Lu Zhang, 2003. "Equilibrium Cross Section of Returns," Journal of Political Economy, University of Chicago Press, vol. 111(4), pages 693-732, August.
  29. Ahn, Seung C. & Gadarowski, Christopher, 2004. "Small sample properties of the GMM specification test based on the Hansen-Jagannathan distance," Journal of Empirical Finance, Elsevier, vol. 11(1), pages 109-132, January.
  30. Kevin J. Stiroh & Dale W. Jorgenson, 1999. "Information Technology and Growth," American Economic Review, American Economic Association, vol. 89(2), pages 109-115, May.
  31. Black, Fischer, 1990. "Mean Reversion and Consumption Smoothing," Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 107-14.
  32. Martin Lettau & Sydney Ludvigson, 2001. "Resurrecting the (C)CAPM: A Cross-Sectional Test When Risk Premia Are Time-Varying," Journal of Political Economy, University of Chicago Press, vol. 109(6), pages 1238-1287, December.
  33. Lewellen, Jonathan & Nagel, Stefan & Shanken, Jay, 2010. "A skeptical appraisal of asset pricing tests," Journal of Financial Economics, Elsevier, vol. 96(2), pages 175-194, May.
  34. Josef Lakonishok & Andrei Shleifer & Robert W. Vishny, 1993. "Contrarian Investment, Extrapolation, and Risk," University of Chicago - George G. Stigler Center for Study of Economy and State 84, Chicago - Center for Study of Economy and State.
  35. Kandel, Shmuel & Stambaugh, Robert F, 1995. " Portfolio Inefficiency and the Cross-Section of Expected Returns," Journal of Finance, American Finance Association, vol. 50(1), pages 157-84, March.
  36. Liew, Jimmy & Vassalou, Maria, 2000. "Can book-to-market, size and momentum be risk factors that predict economic growth?," Journal of Financial Economics, Elsevier, vol. 57(2), pages 221-245, August.
  37. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  38. Qing Li & Maria Vassalou & Yuhang Xing, 2006. "Sector Investment Growth Rates and the Cross Section of Equity Returns," The Journal of Business, University of Chicago Press, vol. 79(3), pages 1637-1665, May.
  39. Balvers, Ronald J & Cosimano, Thomas F & McDonald, Bill, 1990. " Predicting Stock Returns in an Efficient Market," Journal of Finance, American Finance Association, vol. 45(4), pages 1109-28, September.
  40. Stephen G. Cecchetti & Pok-sang Lam & Nelson C. Mark, 1988. "Mean Reversion in Equilibrium Asset Prices," NBER Working Papers 2762, National Bureau of Economic Research, Inc.
  41. De Bondt, Werner F M & Thaler, Richard H, 1987. " Further Evidence on Investor Overreaction and Stock Market Seasonalit y," Journal of Finance, American Finance Association, vol. 42(3), pages 557-81, July.
  42. Peng, Yajun & Shawky, Hany, 1999. " Stochastic Discount Rates, Productivity Shocks and Capital Asset Pricing," Review of Quantitative Finance and Accounting, Springer, vol. 12(1), pages 21-34, January.
  43. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
  44. Fama, Eugene F & French, Kenneth R, 1988. "Permanent and Temporary Components of Stock Prices," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 246-73, April.
  45. Sims, Christopher A & Stock, James H & Watson, Mark W, 1990. "Inference in Linear Time Series Models with Some Unit Roots," Econometrica, Econometric Society, vol. 58(1), pages 113-44, January.
  46. Lettau, Martin & Ludvigson, Sydney, 1999. "Consumption, Aggregate Wealth and Expected Stock Returns," CEPR Discussion Papers 2223, C.E.P.R. Discussion Papers.
  47. Lewellen, Jonathan & Nagel, Stefan, 2003. "The Conditional CAPM Does Not Explain Asset-pricing Anomalies," Working papers 4427-03, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  48. Bahk, Byong-Hong & Gort, Michael, 1993. "Decomposing Learning by Doing in New Plants," Journal of Political Economy, University of Chicago Press, vol. 101(4), pages 561-83, August.
  49. Fama, Eugene F & French, Kenneth R, 1996. " Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
  50. Vassalou, Maria, 2003. "News related to future GDP growth as a risk factor in equity returns," Journal of Financial Economics, Elsevier, vol. 68(1), pages 47-73, April.
  51. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  52. Balvers, Ronald J. & Huang, Dayong, 2009. "Money and the C-CAPM," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(02), pages 337-368, April.
  53. Lu Zhang, 2005. "The Value Premium," Journal of Finance, American Finance Association, vol. 60(1), pages 67-103, 02.
  54. Petkova, Ralitsa & Zhang, Lu, 2005. "Is value riskier than growth?," Journal of Financial Economics, Elsevier, vol. 78(1), pages 187-202, October.
  55. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-87, September.
  56. Robert G. King & Sergio T. Rebelo, 2000. "Resuscitating Real Business Cycles," NBER Working Papers 7534, National Bureau of Economic Research, Inc.
  57. Motohiro Yogo, 2006. "A Consumption-Based Explanation of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 61(2), pages 539-580, 04.
  58. David N. DeJong & Beth F. Ingram, 2001. "The Cyclical Behavior of Skill Acquisition," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(3), pages 536-561, July.
  59. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
  60. Chen, Nai-Fu, 1991. " Financial Investment Opportunities and the Macroeconomy," Journal of Finance, American Finance Association, vol. 46(2), pages 529-54, June.
  61. Breeden, Douglas T., 1979. "An intertemporal asset pricing model with stochastic consumption and investment opportunities," Journal of Financial Economics, Elsevier, vol. 7(3), pages 265-296, September.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:wvu:wpaper:05-05. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Josh Hall)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.