 Are the profitability and investment factors valid ICAPM risk factors? Pre-1963 evidenceQi Lin and Xi Lin The North American Journal of Economics and Finance, 2021, vol. 58, issue C 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. Keywords: Profitability; Investment; Intertemporal CAPM; Covariance risk price; Investment opportunity set (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:58:y:2021:i:c:s1062940821000851 DOI: 10.1016/j.najef.2021.101460 Access Statistics for this article The North American Journal of Economics and Finance is currently edited by Hamid Beladi More articles in The North American Journal of Economics and Finance from Elsevier |
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