An Accounting-Based Asset Pricing Model and a Fundamental Factor

80 Pages Posted: 10 Jun 2019

See all articles by Stephen H. Penman

Stephen H. Penman

Columbia Business School - Department of Accounting

Julie Zhu

Fanhai International School of Finance(FISF), Fudan University

Date Written: May 1, 2019

Abstract

This paper recasts the consumption asset pricing model in terms of observable accounting outcomes by recognizing accounting principles that connect those outcomes to consumption and the risk to consumption. The model prompts the construction of a pricing factor from observed accounting information that contrasts to existing models where accounting data often enter via data dredging. The factor performs well relative to standard factors in explaining cross-sectional returns. Further, it delivers out-of-sample expected returns that forecast the actual returns that investors receive and the forward betas that investors actually experience. The factor return has little correlation with the market portfolio and exhibits the property of protecting payoffs in bad states when consumption is low. This prompts a two-factor representation that combines the market portfolio and a zero-beta portfolio with a hedge against loss to consumption.

Suggested Citation

Penman, Stephen H. and Zhu, Julie, An Accounting-Based Asset Pricing Model and a Fundamental Factor (May 1, 2019). Available at SSRN: https://ssrn.com/abstract=3393068 or http://dx.doi.org/10.2139/ssrn.3393068

Stephen H. Penman (Contact Author)

Columbia Business School - Department of Accounting ( email )

3022 Broadway
New York, NY 10027
United States
212-854-9151 (Phone)
212-316-9219 (Fax)

Julie Zhu

Fanhai International School of Finance(FISF), Fudan University ( email )

220 Handan Road
Shanghai, 200433
China

Register to save articles to
your library

Register

Paper statistics

Downloads
154
Abstract Views
606
rank
195,789
PlumX Metrics