Augmenting the Intertemporal CAPM with Inflation: Further Evidence from Alternative Models

Posted: 2 Jun 2020

See all articles by Qi Shi

Qi Shi

Griffith University, Griffith Business School, Department of Accounting, Finance and Economics

Bin Li

Griffith University - Department of Accounting, Finance and Economics

Adrian (Wai‐Kong) Cheung

Curtin University

Richard Chung

Griffith University - Department of Accounting, Finance and Economics

Date Written: May 23, 2017

Abstract

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.

Keywords: Asset pricing, ICAPM, inflation, over-fitting problem

Suggested Citation

Shi, Qi and Li, Bin and Cheung, Adrian (Wai‐Kong) and Chung, Richard, Augmenting the Intertemporal CAPM with Inflation: Further Evidence from Alternative Models (May 23, 2017). Australian Journal of Management, Vol. 42, No. 4, 2017, Available at SSRN: https://ssrn.com/abstract=3592439

Qi Shi (Contact Author)

Griffith University, Griffith Business School, Department of Accounting, Finance and Economics ( email )

PMB 50
Gold Coast Queensland 9726
Australia

Bin Li

Griffith University - Department of Accounting, Finance and Economics ( email )

Nathan
Brisbane, Queensland, 4111
Australia

Adrian (Wai‐Kong) Cheung

Curtin University

Kent Street
Bentley
Perth, WA WA 6102
Australia

Richard Chung

Griffith University - Department of Accounting, Finance and Economics ( email )

PMB 50
Gold Coast Queensland 9726
Australia

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