Investment-specific Technological Change And A Cross-sectional Test Of An Investment-based Asset Pricing Model

Using macroeconomic and financial data from 1954 to 2017 in the United States,this paper examines whether investment-specific technology shock helps to capture risks in stock market.Based on Cochrane(1991)production-based asset pricing model,this paper introduces heterogeneous physical capital and constructs equipment investment return and structure investment return by estimating depreciation rate,marginal productivity and adjustment cost parameters of two capital.Equipment and structure investment returns are used to characterize macro risks that relate to stock returns closely,namely aggregate technology shock and investment-specific technology shock.Besides,this paper examines whether equipment and structure investment returns are priced in stock market based on Cochrane(1996)investment-based asset pricing model.The results show that equipment and structure investment returns help to explain variation in expected returns across assets and over time,which suggests that investment-specific technology shock not only plays an important role in explaining macroeconomic growth and cyclical fluctuations,but also is an important risk factor that is priced in stock market.The conclusions of this paper also indicate that investors should consider the impact of investment-specific technology shock on stock returns when selecting the optimal asset allocation portfolio.And it is important to distinguish stock returns of those who focus on equipment investment from those who invest more on structure capital.