Long-term perspective on the stock market matters in asset pricing

We provide a more intuitive interpretation of Campbell's (1993) intertemporal capital asset pricing model. In this model, investors' long-term perspective on the stock market matters and the revision on the perspective becomes a pricing factor. We construct this factor series from out-of-sample forecasts and it allows us to avoid the perfect foresight problem of the VAR factor model and to deal with on-going debate on the return predictability. Our empirical results suggest that the innovation factor is strongly and robustly priced across assets and has close relationship with the momentum and liquidity factors.