Equilibrium Cross-Section of Returns

Posted: 22 Oct 2002

See all articles by Leonid Kogan

Leonid Kogan

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Joao F. Gomes

The Wharton School

Lu Zhang, 张橹

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

Multiple version iconThere are 3 versions of this paper

Date Written: 2002

Abstract

We construct a dynamic general equilibrium production economy to explicitly link expected stock returns to firm characteristics such as firm size and the book-to-market ratio. Stock returns in the model are completely characterized by a conditional CAPM. Size and book-to-market are correlated with the true conditional market beta and therefore appear to predict stock returns. The cross-sectional relations between firm characteristics and returns can subsist even after one controls for typical empirical estimates of beta. These findings suggest that the empirical success of size and book-to-market can be consistent with a single-factor conditional CAPM model.

Keywords: Asset Pricing, Stock Returns, Book-to-market, Size, Equilibrium, Cross-section, Production, Investment, Business Cycle, Aggregation, Heterogeneity

JEL Classification: G12, G1, E23

Suggested Citation

Kogan, Leonid and Gomes, João F. and Zhang, Lu, Equilibrium Cross-Section of Returns (2002). Journal of Political Economy, June or August 2003. Available at SSRN: https://ssrn.com/abstract=331441

Leonid Kogan (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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João F. Gomes

The Wharton School ( email )

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Lu Zhang

Ohio State University - Fisher College of Business ( email )

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National Bureau of Economic Research (NBER)

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