An Investment-Growth Asset Pricing Model

58 Pages Posted: 21 Jul 2001

See all articles by Qing Li

Qing Li

Columbia University - Columbia Business School

Maria Vassalou

Centre for Economic Policy Research (CEPR)

Yuhang Xing

Rice University

Multiple version iconThere are 2 versions of this paper

Date Written: March 7, 2001


In this paper we present a simple model where asset returns are functions of multiple investment growth rates. The model is tested for its ability to price the 25 Fama-French portfolios using the Generalized Methods of Moments (GMM) methodology, as well as Fama-MacBeth cross-sectional regressions. Comparisons on the basis of several metrics with other models, such as the CAPM, the Fama-French (1993) model and Cochrane's (1996) model, reveal that it consistently outperforms the CAPM and Cochrane's model. It also outperforms the Fama-French model in several tests. Our model can explain a significantly larger proportion of the cross-sectional variation in the 25 Fama-French portfolios than the Fama-French model does. Specification tests in the context of GMM and the Fama-MacBeth regressions show that in the presence of the investment growth factors included in our model, the size and book-to-market characteristics lose their ability to explain asset returns. Our model is successful in pricing size- and book-to-market- sorted portfolios, although it includes exclusively macroeconomic variables as factors.

Keywords: Asset pricing, Investment growth

JEL Classification: G12

Suggested Citation

Li, Qing and Vassalou, Maria and Xing, Yuhang, An Investment-Growth Asset Pricing Model (March 7, 2001). Available at SSRN: or

Qing Li

Columbia University - Columbia Business School ( email )

3022 Broadway
Department of Finance and Economics 313 Uris Hall
New York, NY 10027
United States

Maria Vassalou (Contact Author)

Centre for Economic Policy Research (CEPR)

United Kingdom

Yuhang Xing

Rice University ( email )

6100 South Main Street
Houston, TX 7705-1892
United States

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