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Money and the C-CAPM

Published online by Cambridge University Press:  01 April 2009

Ronald J. Balvers  and
Dayong Huang
Ronald J. Balvers
Affiliation:
West Virginia University, College of Business and Economics, PO Box 6025, Morgantown, WV 26506. rbalvers@wvu.edu
Dayong Huang
Affiliation:
University of North Carolina at Greensboro, Bryan School of Business and Economics, PO Box 26165, Greensboro, NC 27402. d_huang@uncg.edu
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Abstract

We consider asset pricing in a monetary economy where liquid assets are held to lower transaction costs. The ensuing model extends the capital asset pricing model (CAPM) and the consumption CAPM by deriving real money growth as an additional factor determining returns. Empirically, the two model versions compare favorably to other theoretical asset pricing models along several dimensions, supporting the traditional intertemporal asset pricing perspective. A value premium arises because value firms are sensitive to liquidity shocks but growth firms are not. Although no alternative factor drives out the money growth factor, the conditioning CAY factors of Lettau and Ludvigson (2001b) add explanatory power.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 44 , Issue 2 , April 2009 , pp. 337 - 368
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2009

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