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TESTING A PRODUCTION‐BASED ASSET‐PRICING MODEL
Author(s) -
Arroyo Cristino R.
Publication year - 1996
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.1996.tb01382.x
Subject(s) - consumption based capital asset pricing model , economics , capital asset pricing model , stock (firearms) , econometrics , investment (military) , financial economics , production (economics) , equity (law) , equity premium puzzle , cost of capital , monetary economics , microeconomics , mechanical engineering , profit (economics) , politics , political science , law , engineering
We develop a dynamic production‐based asset‐pricing model from the solution cf a representative firm's investment and financing problem. Nonnegative correlation between capital stocks and asset returns is accommodated, as well as equity premia arisingfrom dtfferential costs of stock versus bondfinance. Under our adjustment‐costs specfication, the returns on the firm's financial instruments become linear functions of the firm's average capital productivity, its investment‐capital ratio, and financial instrument‐specific costs. Empirical tests using U.S. T‐bill rates and common stock returns yield plausible parameter estima tes and coofrm the significance qfthesefictors.