Asset Growth, Profitability, and Investment Opportunities

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Sammanfattning

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.
OriginalspråkEngelska
Referentgranskad vetenskaplig tidskriftManagement Science
Volym65
Nummer9
Sidor (från-till)3988-4010
Antal sidor23
ISSN0025-1909
DOI
StatusPublicerad - 2018
MoE-publikationstypA1 Originalartikel i en vetenskaplig tidskrift

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