Are the profitability and investment factors valid ICAPM risk factors? Pre-1963 evidence |
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Institution: | 1. School of Finance, Zhejiang University of Finance and Economics, 18 Xueyuan Street, Hangzhou 310018, China;2. Financial Innovation and Inclusive Finance Research Center, Zhejiang University of Finance and Economics, 18 Xueyuan Street, Hangzhou 310018, China;3. School of Economics, Shanghai University, 99 Shangda Road, Shanghai 200444, China;1. School of Economics and Management, Shanxi University, Taiyuan, China;2. Department of Economics, Pusan National University, Busan, Republic of Korea;1. School of Business, Chengdu University of Technology, Chengdu 610059, China;2. School of Economics and Statistics, Guangzhou University, Guangzhou 510006, China;1. Graduate Program in Economics, Federal University of Santa Catarina, 88049-970 Florianopolis S.C., Brazil;2. Department of Economics, Federal University of Santa Catarina, 88049-970 Florianopolis S.C., Brazil;3. Department of Statistics, University of Brasilia, 70910-900 Brasilia, D.F., Brazil;4. Graduate Program in Business Administration, University of Brasilia, 70910-900 Brasilia D.F., Brazil;5. Graduate Program in Economics, Federal University of Espirito Santo, 29075-910 Vitoria E.S., Brazil |
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Abstract: | We empirically evaluate whether the profitability and investment factors from Novy-Marx (2013) and Fama and French (2015, 2018) are compatible with Merton’s (1973) intertemporal CAPM (ICAPM) framework in the pre-1963 period. We show that: (i) the covariance risk price estimates of the profitability factors are positive and statistically significant, which indicates that they have explanatory power with respect to the cross-section of stock returns; (ii) the investment factors carry insignificant covariance risk prices and are therefore not valid ICAPM risk factors; and (iii) the profitability factors forecast the first moment of the aggregate stock return and economic activity with the correct sign, which is consistent with their positive covariance risk price estimates and satisfies the sign restrictions associated with the ICAPM. |
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Keywords: | Profitability Investment Intertemporal CAPM Covariance risk price Investment opportunity set G11 G12 |
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