Asset pricing with empirical, zero-beta, macro and state variables in international equity markets

This study aims to improve asset pricing by using empirical, zero-beta, macro and state variables. Firstly, we improve asset pricing with empirical factors as we find the gap that the five-factor model augmented with momentum factor, is yet to be examined in international equity markets. We use the time-series and cross-sectional tests to assess the performance of this six-factor model and compare the performance with other traditional asset pricing models. Findings suggest that the five-factor model improves with the addition of momentum factor. Secondly, we attempt to improve asset pricing by using the gold return as a proxy of the zero-beta rate in global regions. We find that the gold beta is insignificantly different from zero in the U.S. and U.K. equity markets. We confirm the efficiency of gold markets with a battery of efficiency tests and find the position of gold at the minimum variance frontier. When we perform empirical tests by using gold as a zero-beta asset in empirical factor models, we find a convincing evidence in those equity markets as we obtain higher R-squared values, lower Sharpe ratios of alphas and fewer significant pricing errors. Thirdly, we examine the role of gold as a hedging factor in the Intertemporal Capital Asset Pricing Model (ICAPM) in the U.S. and global asset pricing. We perform multivariate and Generalised Method of Moments (GMM) to assess the joint significance of the market and gold price factors. We find that the gold is not a useless factor both in the U.S. and the global asset pricing. Fourthly, we employ empirical, macroeconomic, and state variables to improve asset pricing. We assess the performance of the 23 asset pricing models with the Merton (1973) criteria of multifactor models. We also explore the innovative role of inflation and industrial production with ICAPM and empirical multifactor models. We employ single and multiple predictive regressions to assess forecasting criteria and utilise first-stage GMM to assess the cross-sectional criteria of multifactor models. Results on the multifactor models confirm earlier findings that the applicability of gold return as a proxy of the zero-beta rate improves the model performance of not only empirical factor model but also ICAPM models. This research has many useful applications for investors, policy makers and regulatory bodies. The alternative zero-beta models are useful to obtain better estimates of expected returns during the market crisis and improve pricing of small and risky stocks