Does Money Explain Asset Returns? Theory and Empirical Analysis

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 a la Fama-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-CAPMtend to be smaller than those of the C-CAPM