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Cash-Flow Risk, Discount Risk, and the Value Premium

Tano Santos and Pietro Veronesi

No 11816, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A habit persistence, general equilibrium model with multiple assets matches both the time series properties of the market portfolio and the cross-sectional predictability of returns on price sorted portfolios, the value premium. Consistent with empirical evidence, the model shows that (a) value stocks are those with higher cash-flow risk; (b) the size of the value premium is larger in "bad times," due to time variation in risk preferences; (c) the unconditional CAPM fails, because of general equilibrium restrictions on the market portfolio. The dynamic nature of the value premium rationalizes why the conditional CAPM and a Fama and French (1993) HML factor outperform the unconditional CAPM.

JEL-codes: G12 (search for similar items in EconPapers)
Date: 2005-12
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-dge, nep-fin and nep-fmk
Note: AP
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Citations: View citations in EconPapers (2)

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