An accounting-based asset pricing model and a fundamental factor

Stephen Penman and Julie Zhu

Journal of Accounting and Economics, 2022, vol. 73, issue 2

Abstract: This paper recasts the consumption asset pricing model in terms of accounting numbers that connect to consumption and the risk to consumption under accounting principles. The modeling yields an expected return measure that forecasts realized returns and the risk to those returns. It leads to the construction of a pricing factor from the accounting information. The factor performs well relative to extant factors in explaining cross-sectional returns. The factor return has negative correlation with the market portfolio and exhibits the property of protecting payoffs in bad states when consumption is low. This then prompts a two-factor representation that combines the market portfolio with a hedge portfolio against loss to consumption.

Keywords: Asset pricing model; Accounting for risk; Risk factor model (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:73:y:2022:i:2:s0165410121000914

DOI: 10.1016/j.jacceco.2021.101476

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