Equity Return Predictability with the ICAPM

37 Pages Posted: 22 Apr 2019 Last revised: 1 Sep 2022

See all articles by Michael Hasler

Michael Hasler

University of Texas at Dallas, Naveen Jindal School of Management, Department of Finance

Charles Martineau

University of Toronto - Rotman School of Management and UTSC Management

Date Written: August 30, 2022

Abstract

This paper highlights the performance of the ICAPM in predicting future asset returns. Consistent with the ICAPM, the relation between future asset returns and betas is positive and statistically significant when future market returns are expected to be high. In addition, the sum of an intertemporal hedging component and beta times the expected market return predicts asset returns out-of-sample, as predicted by the ICAPM. Consequently, timing strategies exploiting the predictive power of the ICAPM have Sharpe ratios that are up to twice those obtained by buying and holding and statistically significant abnormal returns (alphas) of about 5% per annum.

Keywords: return predictability, intertemporal capital asset pricing model, investment strategies

JEL Classification: D53, G11, G12

Suggested Citation

Hasler, Michael and Martineau, Charles, Equity Return Predictability with the ICAPM (August 30, 2022). Available at SSRN: https://ssrn.com/abstract=3368264 or http://dx.doi.org/10.2139/ssrn.3368264

Michael Hasler

University of Texas at Dallas, Naveen Jindal School of Management, Department of Finance ( email )

800 West Campbell
Richarson, TX 75080
United States

Charles Martineau (Contact Author)

University of Toronto - Rotman School of Management and UTSC Management ( email )

105 St-George
Toronto, Ontario M5S3E6
Canada

HOME PAGE: http://charlesmartineau.com

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