Does Money Explain Asset Returns? Theory and Empirical Analysis

  • Author(s): K. C. CHAN, SILVERIO FORESI, LARRY H. P. LANG
  • Published: Apr 30, 2012
  • Pages: 345-361
  • DOI: 10.1111/j.1540-6261.1996.tb05212.x

ABSTRACT

A cash‐in‐advance model of a monetary economy is used to derive a money‐based CAPM (M‐CAPM), which allows us to implement tests of asset pricing restrictions without consumption data. A test as in Fama and MacBeth of the model suggests that the money betas have some explanatory power for the cross‐sectional variation of expected returns; however, the model is rejected using conditional information. Consistent with our predictions, estimates of the curvature parameter are lower than those of the consumption CAPM (C‐CAPM) and pricing errors of the M‐CAPM tend to be smaller than those of the C‐CAPM.

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