Does Money Explain Asset Returns? Theory and Empirical Analysis

Posted: 5 May 1998

See all articles by K.C. Chan

K.C. Chan

Hong Kong University of Science & Technology (HKUST) - Department of Finance

Silverio Foresi

Goldman Sachs Group, Inc. - Quantitative Strategy Group

Larry H.P. Lang

The Chinese University of Hong Kong (CUHK) - Department of Finance

Abstract

A cash-in-advance model of a monetary economy is used to derive a money-based CAPM (M-CAPM) which allows us to implement tests of asset pricing restrictions without consumption data. A test a la Fama-MacBeth of the model suggests that the money betas have some explanatory power for the cross-sectional variation of expected returns; however, the model is rejected using conditional information. Consistent with our predictions, estimates of the curvature parameter are lower than those of the consumption CAPM (C-CAPM) and pricing errors of the M-CAPMtend to be smaller than those of the C-CAPM.

JEL Classification: G12, E44

Suggested Citation

Chan, Kakeung C. and Foresi, Silverio and Lang, Hsien Ping Larry, Does Money Explain Asset Returns? Theory and Empirical Analysis. J. OF FINANCE, Vol. 51 No. 1. Available at SSRN: https://ssrn.com/abstract=7611

Kakeung C. Chan

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

Clear Water Bay, Kowloon
Hong Kong
852-2358 7669 (Phone)
852-2358 1749 (Fax)

Silverio Foresi (Contact Author)

Goldman Sachs Group, Inc. - Quantitative Strategy Group ( email )

32 Old Slip, 24th Floor
New York, NY 10005
United States
(212) 357-3508 (Phone)

Hsien Ping Larry Lang

The Chinese University of Hong Kong (CUHK) - Department of Finance ( email )

Shatin, N.T.
Hong Kong
+85 2 2609 7761 (Phone)
+85 2 2603 6586 (Fax)

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