Stock Return, Investment Opportunity And Intertemporal Asset Pricing

As one of the most classical models in financial study, however, the empirical analysis of capital asset pricing model (CAPM) didn’t show well. New anomalies found in capital market were replacing the explanation power of CAPM. In this paper, I change the investment period from single-period to multi-period to introduce intertemporal capital asset pricing model (ICAPM). The starting point of this paper is to prove the efficiency of this model in Chinese stock market and the key point lies in figuring out important state variables that have great influence on market’s return. Based on classical CAPM, I introduce the basic formula of ICAPM derived by Merton, and show that even the asset with zero beta would also get a price premium from market. Based on stock market, bond market and company variables, I present 10 key state variables. By using data on Chinese stock market for 375 weeks/88 months and by using three models:classical CAPM, FF three-factor model and ten-factor ICAPM, and by using VAR model and Fama-Macbeth method, I get the main results:the explanation power of FF three-factor model is better than classical CAPM, while ten-factor ICAPM do better than FF three-factor model in asset pricing; the risk premium of size factor keeps significant in various models so it’s truly an important state variable. Moreover, there are two noteworthy phenomenon:risk premium of market factor keeps negative; explanation power of book-to-market ratio drops after adding new state variables. I try to explain these anomalies. This paper also make some introduction and conclusion about relative concepts, such as conditional CAPM, stochastic discount factor, Fama and French’s research findings, as well as lots of conclusions and thinking ideas from many noteworthy papers.