Equilibrium Cross Section of Returns
Year: 2003
Type: article
Abstract: We construct a dynamic general equilibrium production economy to explicitly link expected stock returns to firm characteristics such as firm size and the book‐to‐market ratio. Stock returns in the model are completely characterized by a conditional capital asset pricing model (CAPM). Size and book‐to‐market are correlated with the true conditional market beta and therefore appear to predict stock returns. The cross‐sectional relations between firm characteristics and returns can subsist even after one controls for typical empirical estimates of beta. These findings suggest that the empirical success of size and book‐to‐market can be consistent with a single‐factor conditional CAPM model.
Source: Journal of Political Economy
DOI: 10.1086/375379
Authors: Joao Gomes, Leonid Kogan, Lu Zhang
Institution: University of Pennsylvania
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W1536779365