Conditional capital asset pricing model, long-run risk, and stock valuation

Claude Bergeron (), Tov Assogbavi () and Jean-pierre Gueyie ()
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Claude Bergeron: School of Business Administration, Teluq University
Tov Assogbavi: Faculty of Management, Laurentian University
Jean-pierre Gueyie: School of Management, University of Quebec in Montreal

Economics Bulletin, 2020, vol. 40, issue 1, 77-86

Abstract: In this note, we integrate the long-run concept of risk into the stock valuation process, using the conditional capital asset pricing model. Our main result indicates that the intrinsic value of a stock is positively related to its long-run dividend growth rate, and negatively related to its long-run covariance between dividends and aggregate dividends. This result suggests that the theoretical framework of the conditional capital asset pricing model can be used to examine the effect of long-run risk on firm values. This result also suggests that the long-run covariance between dividends and aggregate dividends represents a relevant measure of risk, without assuming anything about aggregate consumption.

Keywords: Asset pricing; CAPM; long-run risk; stock valuation; dividends (search for similar items in EconPapers)
JEL-codes: G1 (search for similar items in EconPapers)
Date: 2020-02-05
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