Aggregation, Capital Heterogeneity, and the Investment CAPM

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

S. Gonçalves, Andrei and Xue, Chen and Zhang, Lu, Aggregation, Capital Heterogeneity, and the Investment CAPM (June 11, 2019). Charles A Dice Center Working Paper No. 2017-19, 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