Augmenting the intertemporal CAPM with inflation: Further evidence from alternative models

Qi Shi, Bin Li, Adrian (Wai-Kong) Cheung () and Richard Chung
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Bin Li: Department of Accounting, Finance and Economics, Griffith Business School, Griffith University, Nathan, QLD, Australia
Richard Chung: Department of Accounting, Finance and Economics, Griffith Business School, Griffith University, Nathan, QLD, Australia

Australian Journal of Management, 2017, vol. 42, issue 4, 653-672

Abstract: Studies consistently find that inflation is an important augmented factor for intertemporal capital asset pricing models (ICAPMs) when pricing the Fama–French 25 size and book-to-market portfolios. We extend this line of research by investigating two alternative ICAPM models (from Michel; Hahn and Lee) and the three-factor model from Hou et al. We find significant evidence that both ICAPMs and Hou et al.’s three-factor model perform better when augmented with inflation than the original models. The augmented models achieve a good model fit with the fewest factors, thus avoiding or alleviating the over-fitting problem.

Keywords: Asset pricing; ICAPM; inflation; over-fitting problem (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:sae:ausman:v:42:y:2017:i:4:p:653-672

DOI: 10.1177/0312896216686153

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