Aggregation, Capital Heterogeneity, and the Investment CAPM

Charles A Dice Center Working Paper No. 2017-19

Fisher College of Business Working Paper No. 2017-03-19

98 Pages Posted: 3 Oct 2017 Last revised: 12 Jun 2019

See all articles by Andrei Gonçalves

Andrei Gonçalves

University of North Carolina (UNC) at Chapel Hill - Finance Area

Chen Xue

University of Cincinnati

Lu Zhang

Ohio State University - Fisher College of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: June 11, 2019

Abstract

A detailed treatment of aggregation and capital heterogeneity substantially improves the performance of the investment CAPM. Firm-level predicted returns are constructed from firm-level accounting variables and aggregated to the portfolio level to match with portfolio-level stock returns. Working capital forms a separate productive input besides physical capital. The model fits well the value, momentum, investment, and profitability premiums simultaneously and partially explains the positive stock-fundamental return correlations, the procyclical and short-term dynamics of the momentum and profitability premiums, as well as the countercyclical and long-term dynamics of the value and investment premiums. However, the model falls short in explaining momentum crashes.

Keywords: The Investment Model of Asset Pricing, GMM, Structural Estimation, Anomalies, Joint Estimation

JEL Classification: D21, D92, E22, E44, G12, G14, G31, G32, G34

Suggested Citation

Gonçalves, Andrei and Xue, Chen and Zhang, Lu, Aggregation, Capital Heterogeneity, and the Investment CAPM (June 11, 2019). Charles A Dice Center Working Paper No. 2017-19, Fisher College of Business Working Paper No. 2017-03-19, Available at SSRN: https://ssrn.com/abstract=3045304 or http://dx.doi.org/10.2139/ssrn.3045304

Andrei Gonçalves

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Chen Xue

University of Cincinnati ( email )

College of Business Administration
Cincinnati, OH 45221
United States
(513) 556-7078 (Phone)

Lu Zhang (Contact Author)

Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
585-267-6250 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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