Equilibrium Cross-Section of Returns
Posted: 22 Oct 2002
There are 3 versions of this paper
Equilibrium Cross-Section of Returns
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: Suggested Citation
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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