Asset Pricing Implications of Money: New Evidence

55 Pages Posted: 1 Feb 2014 Last revised: 18 Sep 2020

See all articles by Paulo F. Maio

Paulo F. Maio

Hanken School of Economics - Department of Finance and Statistics

Andre C. Silva

Nova School of Business and Economics

Date Written: September 18, 2020

Abstract

We provide new evidence on the role of real money balances in terms of explaining equity risk premia by using a rich cross-section of average stock returns (associated with 11 major CAPM anomalies). By estimating Euler equations associated with a cash-in-advance (CIA) model, we find that such model produces substantially smaller pricing errors than the baseline consumption model, while still generating lower estimates of the risk aversion coefficient. The estimates of the parameter governing the share of cash goods are highly significant and plausible in economic terms. A transaction-costs model and a money-in-the-utility model perform considerably worse than the CIA model, both in terms of statistical fit and in terms of the plausibility of the structural parameter estimates. Moreover, a linear version of the CIA model also largely underperforms the corresponding non-linear model.

Keywords: Asset pricing; consumption-based asset pricing models; money; cross-section of stock returns; Euler equations; stock market anomalies; macroeconomic asset pricing models

JEL Classification: E44; G11; G12

Suggested Citation

Maio, Paulo F. and Silva, Andre C., Asset Pricing Implications of Money: New Evidence (September 18, 2020). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2388879 or http://dx.doi.org/10.2139/ssrn.2388879

Paulo F. Maio (Contact Author)

Hanken School of Economics - Department of Finance and Statistics ( email )

FI-00101 Helsinki
Finland

HOME PAGE: http://sites.google.com/site/paulofmaio/home

Andre C. Silva

Nova School of Business and Economics ( email )

Campus de Carcavelos
Carcavelos, 2775-405
Portugal

HOME PAGE: http://sites.google.com/view/andredecastrosilva

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