A Business Cycle Asset Pricing Model

74 Pages Posted: 1 Nov 2019

See all articles by Wai Man Tse

Wai Man Tse

Chu Hai College of Higher Education; Lingnan University

Date Written: October 11, 2019

Abstract

An asset pricing model is introduced that captures the market, liquidity, credit, and business cycle risks. The explicit incorporation of economic-phase-switching business cycle risks makes the predicted return volatility equal to the observed return volatility. Therefore, the concerns over excessive volatility and equity premium puzzle become insignificant in the model. The risk-return tradeoff dynamic disequilibrium model builds on the equilibrium CAPM, taken as its steady state. It has no worse explanatory power than that of the Fama-French three-factor model and its variants but significantly better out-of-sample predictive power and ex post S&P 500 portfolio returns over the last 20-year period.

Keywords: Asset Pricing Model, Economic-Phase-Switching Business Cycle

JEL Classification: G11 and G12

Suggested Citation

Tse, Wai Man, A Business Cycle Asset Pricing Model (October 11, 2019). Available at SSRN: https://ssrn.com/abstract=3468201

Wai Man Tse (Contact Author)

Chu Hai College of Higher Education ( email )

80 Castle Peak Road, Castle Peak Bay, Tuen Mun
New Territories
Hong Kong
(852) 9262 5516 (Phone)

Lingnan University ( email )

8 Castle Peak Rd
Tuen Mun
Hong Kong

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