The cross-section of equity returns and assets’ fundamental cash-flow risk

Victoria Galsband ()

Financial Markets and Portfolio Management, 2010, vol. 24, issue 4, 327-351

Abstract: The decomposition of consumption beta into a component driven by assets’ cash-flow news and one related to assets’ discount-rate news reveals that macroeconomic risks embodied in cash flows largely account for the cross-sectional dynamics of average stock returns. Empirically, we find that differences in expected excess returns between low book-to-market and high book-to-market portfolios are associated with differences in their cash-flow betas, and thus reflect macroeconomic, especially consumption-related risks. This result holds true for a broad set of consumption-based asset pricing models. In addition, the results indicate that the risk premium on equity markets is primarily driven by the exposure of assets’ cash-flow components to the cyclical variability of durable consumption goods. Copyright Swiss Society for Financial Market Research 2010

Keywords: Return decomposition; Cash-flow news; Discount-rate news; Consumption growth; E21; G11; G12 (search for similar items in EconPapers)
Date: 2010
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DOI: 10.1007/s11408-010-0140-z

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