Aggregation, Capital Heterogeneity, and the Investment CAPM

Charles A Dice Center Working Paper No. 2017-19

Fisher College of Business Working Paper No. 2017-03-19

63 Pages Posted: 3 Oct 2017 Last revised: 4 Dec 2017

See all articles by Andrei Gonçalves

Andrei Gonçalves

Ohio State University (OSU), Fisher College of Business, Department of Finance

Chen Xue

University of Cincinnati

Lu Zhang, 张橹

Ohio State University - Fisher College of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: December 4, 2017

Abstract

This paper provides a careful treatment of aggregation, and to a lesser extent, capital heterogeneity in the investment CAPM. Firm-level investment returns are constructed from firm-level variables, and then aggregated to the portfolio level to match with portfolio-level stock returns. Current assets form a separate production input besides physical capital. The model fits well the value, momentum, investment, and profitability premiums simultaneously, and partially explains the positive stock-investment return correlations, the procyclical and short-term dynamics of the momentum and profitability premiums, as well as the countercyclical and long-term dynamics of the value and investment premiums. However, the model fails to explain momentum crashes.

Keywords: The Investment Model of Asset Pricing, GMM, Structural Estimation, Anomalies, Joint Estimation

JEL Classification: D21, D92, E22, E44, G12, G14, G31, G32, G34

Suggested Citation

Gonçalves, Andrei and Xue, Chen and Zhang, Lu, Aggregation, Capital Heterogeneity, and the Investment CAPM (December 4, 2017). Fisher College of Business Working Paper No. 2017-03-19; Fisher College of Business Working Paper No. 2017-03-19. Available at SSRN: https://ssrn.com/abstract=3045304 or http://dx.doi.org/10.2139/ssrn.3045304

Andrei Gonçalves

Ohio State University (OSU), Fisher College of Business, Department of Finance ( email )

2100 Neil Avenue
Columbus, OH
United States

HOME PAGE: http://fisher.osu.edu/academic-departments/department-finance

Chen Xue

University of Cincinnati ( email )

College of Business Administration
Cincinnati, OH 45221
United States
(513) 556-7078 (Phone)

Lu Zhang (Contact Author)

Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
585-267-6250 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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