Aggregation, Capital Heterogeneity, and the Investment CAPM
Charles A Dice Center Working Paper No. 2017-19
63 Pages Posted: 3 Oct 2017 Last revised: 4 Dec 2017
Date Written: December 4, 2017
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: Suggested Citation