Asset pricing implications of money: New evidence

Paulo Maio and Andre Silva ()

Journal of Banking & Finance, 2020, vol. 120, issue C

Abstract: We provide new evidence on the role of real money balances in terms of explaining equity risk premia by using a rich cross-section of average stock returns (associated with 11 major CAPM anomalies). By estimating Euler equations associated with a cash-in-advance (CIA) model, we find that such model produces substantially smaller pricing errors than the baseline consumption model, while still generating lower estimates of the risk aversion coefficient. The estimates of the parameter governing the share of cash goods are highly significant and plausible in economic terms. A transaction-costs model and a money-in-the-utility model perform considerably worse than the CIA model, both in terms of statistical fit and in terms of the plausibility of the structural parameter estimates. Moreover, a linear version of the CIA model also largely underperforms the corresponding non-linear model.

Keywords: Asset pricing; Consumption-based asset pricing models; Money; Cross-section of stock returns; Euler equations; Stock market anomalies; Macroeconomic asset pricing models (search for similar items in EconPapers)
JEL-codes: E44 G11 G12 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:120:y:2020:i:c:s0378426620302181

DOI: 10.1016/j.jbankfin.2020.105956

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