Discussion paper

DP18094 Estimating and Testing Investment-based Asset Pricing Models

Abstract Most investment-based asset pricing models predict a close link between a firm's stock return and firm-characteristics at any point in time. Yet, previous work typically examines the weaker prediction that this link should hold on average. We show how to incorporate the time-series predictions in the estimation and testing of investment-based models using the generalized method of moments. We find that standard specifications of the investment-based model with one physical capital input fail to match the time series properties of stock returns in the data, and discuss the implications of the findings for future research.


Belo, F, Y Deng and J Salomao (eds) (2023), “DP18094 Estimating and Testing Investment-based Asset Pricing Models”, CEPR Press Discussion Paper No. 18094. https://cepr.org/publications/dp18094