FIN-02-057 |
NYU Stern School of Business |
Time Series and Cross-sectional Variations of Expected
Returns
October 2002
Qiang Dai
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 standardd 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.
Qiang Dai
Institution: Stern School of Business, New York University, 44th West 4th Street, NY 10012
Telephone: (212) 998-0358
Fax: (212) 995-4233
Email: qdai@stern.nyu.edu
Homepage: http://www.stern.nyu.edu/~qdai
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