A Cross-Sectional Test of a Production-Based Asset Pricing Model

66 Pages Posted: 28 Dec 2006 Last revised: 3 Jul 2022

See all articles by John H. Cochrane

John H. Cochrane

Hoover Institution; National Bureau of Economic Research (NBER)

Date Written: March 1992


This paper tests a factor pricing model for stock returns. The factors are returns on physical investment, inferred from investment data via a production function. The tests examine the model's ability to explain the variation in expected returns across assets and over time. The model is not rejected. It performs about as well as the CAPM and the Chen, Roll and Ross factor model, and it performs substantially better than a simple consumption-based model. In comparison tests, the investment return factors drive out all the other models. The paper also provides an easy technique for estimating and testing dynamic, conditional asset pricing models. All one has to do is include factors and returns scaled by instruments in an unconditional estimate. This procedure imposes none of the usual restrictions on conditional moments, and does not require prewhitened or orthogonalized factors.

Suggested Citation

Cochrane, John H., A Cross-Sectional Test of a Production-Based Asset Pricing Model (March 1992). NBER Working Paper No. w4025, Available at SSRN: https://ssrn.com/abstract=476159

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