Why Is Long‐Horizon Equity Less Risky? A Duration‐Based Explanation of the Value Premium

Martin Lettau and Jessica A. Wachter

Journal of Finance, 2007, vol. 62, issue 1, 55-92

Abstract: We propose a dynamic risk‐based model that captures the value premium. Firms are modeled as long‐lived assets distinguished by the timing of cash flows. The stochastic discount factor is specified so that shocks to aggregate dividends are priced, but shocks to the discount rate are not. The model implies that growth firms covary more with the discount rate than do value firms, which covary more with cash flows. When calibrated to explain aggregate stock market behavior, the model accounts for the observed value premium, the high Sharpe ratios on value firms, and the poor performance of the CAPM.

Date: 2007
References: Add references at CitEc
Citations: View citations in EconPapers (182)

Downloads: (external link)
https://doi.org/10.1111/j.1540-6261.2007.01201.x

Related works:
Working Paper: Why is Long-Horizon Equity Less Risky? A Duration-based Explanation of the Value Premium (2005)
Working Paper: Why is Long-Horizon Equity Less Risky? A Duration-Based Explanation of the Value Premium (2005)
Working Paper: Why is Long-Horizon Equity Less Risky? A Duration-Based Explanation of the Value Premium (2005)
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: https://EconPapers.repec.org/RePEc:bla:jfinan:v:62:y:2007:i:1:p:55-92

Ordering information: This journal article can be ordered from
http://www.afajof.org/membership/join.asp

Access Statistics for this article

More articles in Journal of Finance from American Finance Association Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().