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

Qi Shi, Bin Li, Adrian Cheung, Richard Chung

Research output: Contribution to journalArticlepeer-review

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.

Original languageEnglish
Pages (from-to)653-672
Number of pages20
JournalAustralian Journal of Management
Volume42
Issue number4
DOIs
Publication statusPublished - 1 Nov 2017

Keywords

  • Asset pricing
  • ICAPM
  • inflation
  • over-fitting problem

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