58 Pages Posted: 21 Jul 2001
Date Written: March 7, 2001
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.
Keywords: Asset pricing, Investment growth
JEL Classification: G12
Suggested Citation: Suggested Citation
Li, Qing and Vassalou, Maria and Xing, Yuhang, An Investment-Growth Asset Pricing Model (March 7, 2001). AFA 2002 Atlanta Meetings. Available at SSRN: https://ssrn.com/abstract=277351 or http://dx.doi.org/10.2139/ssrn.277351