This paper examines the equilibrium relationship between future money growth and expected stock returns in the Korean markets, and proposes revisions in the expectation of future money growth as a macroeconomic state variable. And, this paper suggests an alternative model including a factor related with future money growth, along with the market factor, SMB, HML and the momentum factor. In cross-sectional asset pricing tests, we find that a factor that captures innovations related to future money growth is priced on stock returns and explains a significant portion of the cross-sectional variation of stock return, even after controlling for the market factor, Fama-French three factors, and the momentum factor.
JEL classification: G12
Keywords: Future money growth, Economic tracking portfolios, Firm size, Book-to-market
