Equity Return Predictability with the ICAPM
Review of Asset Pricing Studies
90 Pages Posted: 22 Apr 2019 Last revised: 26 Mar 2024
Date Written: November 4, 2023
Abstract
This paper highlights a positive and significant beta-return relationship in high expected market return states, as suggested by the ICAPM. The ICAPM has strong out-of-sample predictive power for equity returns. As a result, timing strategies exploiting this predictive power have Sharpe ratios about double those of the buy-and-hold strategies, alphas of about 5% per annum, and average returns increasing sharply with unconditional betas. Our findings relate to the positive beta-return relation uncovered overnight, on macroeconomic announcement days, and in low inflation times because these periods share an important common feature: high market returns.
Keywords: return predictability, intertemporal capital asset pricing model, investment strategies
JEL Classification: D53, G11, G12
Suggested Citation: Suggested Citation