Aggregation, Capital Heterogeneity, and the Investment CAPM
Charles A Dice Center Working Paper No. 2017-19
96 Pages Posted: 3 Oct 2017 Last revised: 15 Jan 2019
Date Written: January 14, 2019
A detailed treatment of aggregation and capital heterogeneity substantially improves the performance of the investment CAPM. Firm-level predicted returns are constructed from firm-level accounting variables and aggregated to the portfolio level to match with portfolio-level stock returns. Working capital forms a separate productive input besides physical capital. The model fits well the value, momentum, investment, and profitability premiums simultaneously and partially explains the positive stock-fundamental 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 falls short in explaining 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: Suggested Citation