Augmenting the intertemporal CAPM with inflation: Further evidence from alternative models

Studies consistently find that inflation is an important augmented factor for intertemporal capital asset pricing models (ICAPMs) when pricing the Fama–French 25 size and book-to-market portfolios. We extend this line of research by investigating two alternative ICAPM models (from Michel; Hahn and Lee) and the three-factor model from Hou et al. We find significant evidence that both ICAPMs and Hou et al.’s three-factor model perform better when augmented with inflation than the original models. The augmented models achieve a good model fit with the fewest factors, thus avoiding or alleviating the over-fitting problem.

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The Earnings/Price Risk Factor in Capital Asset Pricing Models

Revista Contabilidade & Finanças ◽

10.1590/1808-057x201412060 ◽

2015 ◽

Vol 27 (70) ◽

pp. 67-79 ◽

Cited By ~ 1

Author(s):

Rafael Falcão Noda ◽

Roy Martelanc ◽

Eduardo Kazuo Kayo

Keyword(s):

Risk Factor ◽

Asset Pricing ◽

Factor Model ◽

Capital Asset Pricing ◽

Price Ratio ◽

Cost Of Equity ◽

Capital Asset ◽

Pricing Models ◽

Asset Pricing Models ◽

Fama And French

This article integrates the ideas from two major lines of research on cost of equity and asset pricing: multi-factor models and ex ante accounting models. The earnings/price ratio is used as a proxy for the ex ante cost of equity, in order to explain realized returns of Brazilian companies within the period from 1995 to 2013. The initial finding was that stocks with high (low) earnings/price ratios have higher (lower) risk-adjusted realized returns, already controlled by the capital asset pricing model's beta. The results show that selecting stocks based on high earnings/price ratios has led to significantly higher risk-adjusted returns in the Brazilian market, with average abnormal returns close to 1.3% per month. We design asset pricing models including an earnings/price risk factor, i.e. high earnings minus low earnings, based on the Fama and French three-factor model. We conclude that such a risk factor is significant to explain returns on portfolios, even when controlled by size and market/book ratios. Models including the high earnings minus low earnings risk factor were better to explain stock returns in Brazil when compared to the capital asset pricing model and to the Fama and French three-factor model, having the lowest number of significant intercepts. These findings may be due to the impact of historically high inflation rates, which reduce the information content of book values, thus making the models based on earnings/price ratios better than those based on market/book ratios. Such results are different from those obtained in more developed markets and the superiority of the earnings/price ratio for asset pricing may also exist in other emerging markets.

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Testing the Performance of Asset Pricing Models in Different Economic and Interest Rate Regimes Using Individual Stock Returns

International Journal of Banking and Finance - Vol. 15, Number 2, 2020 ◽

10.32890/ijbf2010.7.1.8400 ◽

2010 ◽

Author(s):

Ann Marie Hibbert ◽

Edward R. Lawrence

Keyword(s):

Asset Pricing ◽

Interest Rate ◽

Stock Returns ◽

Factor Model ◽

Capital Asset Pricing ◽

Capital Asset ◽

Asset Pricing Model ◽

Asset Pricing Models ◽

Three Factor ◽

Better Than

Using return data for all stocks continuously traded on the NYSE over the period July 1963 to December 2006, we tested the performance of the two-moment Capital Asset Pricing Model (CAPM) and the Fama French three-factor model in explaining individual stock returns. We found the performance of Fama French three-factor model to be marginally better than the CAPM. We further test the models for the significance and stability of parameters in the bull/bear periods and the Federal increasing/decreasing interest rate periods and found the performance of the two models comparable.

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