Beta’s Cash Flow and Discount Rate Components

James Ming Chen ()
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James Ming Chen: Michigan State University

Chapter Chapter 9 in Econophysics and Capital Asset Pricing, 2017, pp 175-187 from Palgrave Macmillan

Abstract: Abstract Beta as the basic unit of systematic risk may be further bifurcated into distinct components reflecting firm-specific changes in cash flow and changes in the economy-wide discount rate. By analogy to cholesterol, these components may be regarded as “bad” and “good.” Whereas “good” beta resulting from unexpectedly negative discount-rate news may be mitigated by later macroeconomic developments, “bad” beta resulting from shocks to cash flow dictates an enduring reduction in the valuation of a firm. The disproportionately high contribution of cash-flow effects to value firms’ betas (relative to growth stock betas) explains the premium on value stocks and provides a related solution to the low-volatility anomaly.

Keywords: Discount Rate; Growth Stocks; Idiosyncratic Volatility; Intertemporal CAPM; Cash Flow News (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:pal:qpochp:978-3-319-63465-4_9

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DOI: 10.1007/978-3-319-63465-4_9

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