This paper develops a capital asset pricing model based on the production side of a monetary economy.
Professor of Finance, EDHEC Risk and Asset Management Research Centre
Professor of Finance, ESSEC Business School, France.
Relying on a general version of the standard Real Business Cycle model with cash and credit goods, we find that the factors determining the mean excess returns on financial assets are i) real capital growth, ii) the nominal interest rate and iii) the capital-to-wealth ratio. Our model is parsimonious in that the results rely neither on any particular specification of the production function nor on capital adjustment costs. Empirical evidence gives strong support to the presence of the elicited factors in the cross section of excess returns on portfolios sorted i) by firm characteristics and ii) by industry. Both unconditional and conditional versions of the model are shown to perform as well as the Fama-French (1993) three-factor model when the universe of 25 portfolios sorted by size and book-to-market ratio is considered. In an extended universe in which 17 industry portfolios are added to these 25 portfolios, the same result holds.
|Research Cluster :||Finance|