Date of this Version
Journal of Political Economy
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.
© 2003 by The University of Chicago.
Gomes, J. F., Kogan, L., & Zhang, L. (2003). Equilibrium Cross Section of Returns. Journal of Political Economy, 111 (4), 693-732. http://dx.doi.org/10.1086/375379
Additional FilesGomesKoganZhangErratum.pdf (26 kB)
Date Posted: 27 November 2017
This document has been peer reviewed.