Innovations in the Future Money Growth and the Cross-Section of Stock Returns in Korea

Abstract

This paper proposes revisions in the expectation of future money growth as a macroeconomic state variable in the perspective of Merton's (Econometrica, 41, 1973, 867) intertemporal capital asset pricing model, and examines whether the factor related with innovations in the expectation of future money growth is priced on stock returns in the Korean stock market after controlling for the market factor, Fama and French's SMB and HML, and the momentum factor. In both the cross-sectional regression tests and the generalized method of moments tests, regardless of the inclusion of the well-known priced factors, we find that the future money growth factor is significantly priced, even after controlling for the other macroeconomic factors. The significance of the future money growth factor becomes stronger in the period after the Asian foreign currency crisis than before the crisis.