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.

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Citation

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