Consumption, money and excess returns

We augment the standard Consumption Capital Asset Pricing Model (CCAPM) by the growth in money holdings and empirically investigate whether money is helpful for pricing a cross-section of US excess returns. We find that the growth in M2 significantly improves the fit of the CCAPM with R ²s well above 80% in a cross-section with the three Fama–French factors, the momentum portfolio, a contrarian portfolio and two bond portfolios as test assets.