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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27440
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| Title: | Time Series and Cross-sectional Variations of Expected Returns |
| Authors: | Dai, Qiang |
| Issue Date: | 29-Oct-2002 |
| Series/Report no.: | SC-AM-02-10 |
| Abstract: | The paper develops a general equilibrium stochastic growth model of a
multi-sector economy subject to i.i.d. taste shocks. Each sector
produces one good, and each firm has a linear production technology and
faces a quadratic capital adjustment cost. The model contains a standard
intertemporal capital asset pricing theory of consumption and portfolio
demands with dynamically complete and frictionless markets and a
standard q-theory of investment under uncertainty. We show that the
equilibrium stochastic investment opportunity set is driven by the
relative shares of firms' nominal capital stocks, and the equilibrium
dynamics of the state vector is driven by firms' relative investment
intensities. Key implications of the model includes (i) the expected
equity returns are endogenously predictable both over time and in the
cross-section; and (ii) the "value anomaly" arises in a
rational expectations equilibrium due to a negative (positive) hedging
demand for value (growth) stocks against the risk of cross-sectional
dispersion of firms' nominal capital stocks. |
| URI: | http://hdl.handle.net/2451/27440 |
| Appears in Collections: | Asset Management
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