Abstract
Recent prominent equity factor models are to a large degree compatible with the Merton's (1973) Intertemporal CAPM (ICAPM). Factors associated with (alternative) profitability measures forecast the equity premium in a way that is consistent with the ICAPM. Several factors (in particular those based on asset growth) forecast a significant decline in stock volatility, being consistent with their prices of risk. Investment-based factors are also strong predictors of an improvement in future economic activity. These predictive abilities are not subsumed by traditional ICAPM state variables. Our results largely legitimate the ICAPM as a common theoretical background for the new multifactor models.
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