Does Money Explain Asset Returns? Theory and Empirical Analysis


  • K. C. CHAN,



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    • Chan is from the Hong Kong University of Science and Technology, Foresi is from the Stern School of Business, New York University, and Lang is from the Chinese University of Hong Kong. We would like to acknowledge helpful comments from Yakov Amihud, Pierluigi Balduzzi, Kobi Boudoukh, Jeff Busse, John Cochrane, Kent Daniel, Kose John, Anthony Lynch, Jianping Mei, Tom Peltier, Rob Stambaugh, René Stulz (the Editor), three anonymous referees, and seminar participants at New York University, Rutgers University, and at the Symposium on Dynamics of Asset Prices at the Western Finance Association Meetings.


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.