Asset Growth, Profitability, and Investment Opportunities

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23 Citations (Scopus)


We show that recent prominent equity factor models are to a large degree compatible with the Intertemporal CAPM (ICAPM) framework. Factors associated with alternative profitability measures forecast the equity premium in a way that is consistent with the ICAPM. Several factors based on firms’ asset growth predict a significant decline in stock market volatility, thus being consistent with their positive prices of risk. The investment-based factors are also strong predictors of an improvement in future economic activity. The time-series predictive ability of most equity state variables is not subsumed by traditional ICAPM state variables. Importantly, factors that earn larger risk prices tend to be associated with state variables that are more correlated with future investment opportunities or economic activity. Moreover, these risk price estimates can be reconciled with plausible risk-aversion parameter estimates. Overall, the ICAPM can be used as a common theoretical background for recent multifactor models.
Original languageEnglish
Peer-reviewed scientific journalManagement Science
Issue number9
Pages (from-to)3988-4010
Number of pages23
Publication statusPublished - 2018
MoE publication typeA1 Journal article - refereed


  • 512 Business and Management
  • asset pricing models
  • equity risk factors
  • intertemporal CAPM
  • predictability of stock returns
  • cross section of stock returns
  • stock market anomalies


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