61 Pages Posted: 14 Sep 2002
Date Written: August 2002
We explicitly link expected stock returns to firm characteristics such as firm size and book-to-market ratio in a dynamic general equilibrium production economy. Despite the fact that stock returns in the model are characterized by an intertemporal CAPM with the market portfolio as the only factor, size and book-to-market play separate roles in describing the cross-section of returns. These firm characteristics appear to predict stock returns because they are correlated with the true conditional market beta of returns. These cross-sectional relations can subsist after one controls for a typical empirical estimate of market beta. This lends support to the view that the documented ability of size and book-to-market to explain the cross-section of stock returns is not necessarily inconsistent with a single-factor conditional CAPM model.
Keywords: Production based asset pricing, beta, size and book-to-market factors, CAPM, business cycle properties of stock returns
JEL Classification: E22, E44, G12
Suggested Citation: Suggested Citation
Gomes, Joao F. and Kogan, Leonid and Zhang, Lu, Equilibrium Cross-Section of Returns (August 2002). CEPR Discussion Paper No. 3482. Available at SSRN: https://ssrn.com/abstract=330581
By Lu Zhang
By Owen Lamont
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File name: DP3482.
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