Can Investment Shocks Explain the Cross Section of Equity Returns?

Using two macro-based measures and one return-based measure of investment-specific technology (IST) shocks, we find that over the 1964–2012 period, exposure to IST shocks cannot explain cross-sectional return spreads based on book-to-market, momentum, asset growth, net share issues, accrual, and price-to-earnings ratio. Only one of the two macro-based measures can explain a sizable portion of the value premium over the longer 1930–2012 period. We also find that the IST risk premium estimates are sensitive to the sample period, the data frequency, the test assets, and the econometric model specification. Impulse responses of aggregate investment and consumption indicate potential measurement problems in IST proxies, which may contribute to the sensitivity of IST risk premium estimates and the failure of IST shocks to explain cross-sectional returns. This paper was accepted by Neng Wang, finance.

[1]  Joseph Chen,et al.  CAPM Over the Long-Run: 1926-2001 , 2003 .

[2]  Toni M. Whited,et al.  Investment‐Based Expected Stock Returns , 2009, Journal of Political Economy.

[3]  L. Kogan,et al.  Growth Opportunities and Technology Shocks , 2010 .

[4]  E. Fama,et al.  The Cross‐Section of Expected Stock Returns , 1992 .

[5]  L. Kogan,et al.  Durability of Output and Expected Stock Returns , 2007, Journal of Political Economy.

[6]  John H. Cochrane,et al.  A Cross-Sectional Test of an Investment-Based Asset Pricing Model , 1996, Journal of Political Economy.

[7]  R. Priestley,et al.  Real investment and risk dynamics , 2011 .

[8]  Giorgio E. Primiceri,et al.  Investment Shocks and the Relative Price of Investment , 2009 .

[9]  Lu Zhang,et al.  A Neoclassical Interpretation of Momentum , 2014 .

[10]  Jay Shanken.  On the Estimation of Beta-Pricing Models , 1992 .

[11]  G. Violante,et al.  Investment-Specific Technical Change in the Us (1947-2000): Measurement and Macroeconomic Consequences , 2002 .

[12]  W. Newey,et al.  Hypothesis Testing with Efficient Method of Moments Estimation , 1987 .

[13]  Ravi Bansal,et al.  Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles , 2000 .

[14]  Fan Yang.  Investment shocks and the commodity basis spread , 2013 .

[15]  Narasimhan Jegadeesh,et al.  Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency , 1993 .

[16]  E. Fama,et al.  Industry costs of equity , 1997 .

[17]  M. King,et al.  INVESTMENT AND TECHNICAL PROGRESS , 1992 .

[18]  James L. Davis,et al.  Characteristics, Covariances, and Average Returns: 1929-1997 , 1999 .

[19]  Dimitris Papanikolaou,et al.  Investment Shocks and Asset Prices , 2011, Journal of Political Economy.

[20]  Jacob S. Sagi,et al.  Firm-specific attributes and the cross-section of momentum , 2007 .

[21]  Andrea Tambalotti,et al.  Investment Shocks and Business Cycles , 2008 .

[22]  L. Kogan,et al.  A Theory of Firm Characteristics and Stock Returns: The Role of Investment-Specific Shocks , 2012 .

[23]  Robert J. Gordon,et al.  The measurement of durable goods prices , 1991 .

[24]  Nicolae Gârleanu,et al.  Technological Growth and Asset Pricing , 2009 .

[25]  E. Fama,et al.  Risk, Return, and Equilibrium: Empirical Tests , 1973, Journal of Political Economy.

[26]  E. Fama,et al.  The Value Premium and the CAPM , 2005 .

[27]  Lawrence J. Christiano,et al.  Stock Market and Investment Goods Prices: Implications for Macroeconomics , 2003 .

[28]  Long-Run Productivity Risk: A New Hope for Production-Based Asset Pricing? , 2014 .

[29]  Lu Zhang,et al.  Equilibrium Cross Section of Returns , 2002, Journal of Political Economy.

[30]  S. Karlin,et al.  Mathematical Methods in the Social Sciences , 1962 .

[31]  A Theory of Firm Characteristics and Stock Returns: The Role of Investment-Specific Shocks , 2012 .

[32]  R. Green,et al.  Optimal Investment, Growth Options, and Security Returns , 1998 .

[33]  Kai Li,et al.  Toward a Quantitative General Equilibrium Asset Pricing Model with Intangible Capital , 2012 .

[34]  Huafeng (Jason) Chen.  Do Cash Flows of Growth Stocks Really Grow Faster? , 2016 .

[35]  L. Kogan,et al.  Displacement Risk and Asset Returns , 2008 .

[36]  Adlai J. Fisher,et al.  Corporate Investment and Asset Price Dynamics: Implications for the Cross-Section of Returns , 2003 .

[37]  Jonas D. M. Fisher.  The Dynamic Effects of Neutral and Investment‐Specific Technology Shocks , 2006, Journal of Political Economy.

[38]  Lu Zhang,et al.  The Value Premium , 2002 .

[39]  E. Fama,et al.  Common risk factors in the returns on stocks and bonds , 1993 .

[40]  Per Krusell,et al.  The Role of Investment-Specific Technological Change in the Business Cycle , 2000 .

[41]  L. Kogan,et al.  Growth Opportunities, Technology Shocks, and Asset Prices , 2014 .