Augmenting the intertemporal CAPM with inflation: Further evidence from alternative models. (November 2017)

• Record Type: Journal Article
• Authors: Shi, Qi; Li, Bin; Cheung, Adrian (Wai Kong); Chung, Richard
• Is Part Of: Australian journal of management. Volume 42:Number 4(2017:Nov.)
• Page Start: 653
• Page End: 672
• Publication Date: 2017-11
• Subjects: Asset pricing -- ICAPM -- inflation -- over-fitting problem; G12; Management -- Periodicals; Management -- Australia -- Periodicals; Business enterprises -- Finance -- Periodicals; Industrial management -- Australia -- Periodicals; 330
• DOI: 10.1177/0312896216686153
• Languages: English
• ISSNs: 0312-8962

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.