Stock Returns and New-Keynesian Factors

I propose a new multi-factor asset pricing model based on New-Keynesian monetary models. This new model provides rational explanations for the average returns of portfolios formed on the financial distress and momentum. The permanent monetary policy factor explains the negative relation between financial distress and average returns. The productivity factor captures the momentum premium. Other New-Keynesian factors also capture part of the value and industry premiums. I conclude that New-Keynesian factors play an important role in driving risk premiums in stock markets.