Equity Return Predictability with the ICAPM

90 Pages Posted: 22 Apr 2019 Last revised: 6 Nov 2023

See all articles by Michael Hasler

Michael Hasler

University of Neuchatel

Charles Martineau

University of Toronto - Rotman School of Management and UTSC Management

Date Written: November 4, 2023

Abstract

This paper highlights a positive and significant beta-return relationship in high expected market return states, as suggested by the ICAPM. The ICAPM has strong out-of-sample predictive power for equity returns. As a result, timing strategies exploiting this predictive power have Sharpe ratios about double those of the buy-and-hold strategies, alphas of about 5% per annum, and average returns increasing sharply with unconditional betas. Our findings relate to the positive beta-return relation uncovered overnight, on macroeconomic announcement days, and in low inflation times because these periods share an important common feature: high market returns.

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 (November 4, 2023). Available at SSRN: https://ssrn.com/abstract=3368264 or http://dx.doi.org/10.2139/ssrn.3368264

Michael Hasler

University of Neuchatel

2, A.-L. Breguet
Neuchatel, CH-2000
Switzerland

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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