Long-Run Cash-Flow and Discount-Rate Risks in the Cross-Section of US Returns

Michail S. Koubouros, Dimitrios Malliaropulos () and Ekaterini Panopoulou ()

Finance from EconWPA

Abstract: This paper decomposes the overall market beta of common stocks into four parts reflecting uncertainty related to the long-run dynamics of stock- specific and market-wide cash flows and discount rates. We employ a discrete time version of Merton’s Intertemporal CAPM to test whether these four sources of risk command different risk prices. The model performs well in pricing average returns on single- and double-sorted portfolios according to size, book-to-market, dividend-price ratios and past risk. It generates high estimates for the explained cross-sectional variation in average returns, lower average pricing errors than the Fama-French three factor model and economically and statistically acceptable estimates for the coefficient of relative risk aversion.

Keywords: CAPM; cash-flow risk; discount-rate risk; asset pricing (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin
Date: 2005-03-11, Revised 2006-01-17
Note: Type of Document - pdf; pages: 42
View list of references

Downloads: (external link)
http://129.3.20.41/eps/fin/papers/0503/0503014.pdf (application/pdf)

Related works:
Working Paper: Long-Run Cash-Flow and Discount-Rate Risks in the Cross-Section of US Returns (2005)
Working Paper: Long-Run Cash-Flow and Discount-Rate Risks in the Cross-Section of US Returns (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:0503014

Access Statistics for this paper

More papers in Finance from EconWPA
Series data maintained by EconWPA ().