Testing a Production-Based Asset-Pricing Model

Cristino R Arroyo

Economic Inquiry, 1996, vol. 34, issue 2, 357-77

Abstract: The author develops a dynamic production-based asset-pricing model from the solution of a representative firm's investment and financing problem. Nonnegative correlation between capital stocks and asset returns is accommodated as well as equity premia arising from differential costs of stock versus bond finance. Under the author's adjustment-costs specification, 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 estimates and confirm the significance of these factors. Copyright 1996 by Oxford University Press.

Date: 1996
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