Macroeconomic risk and the cross-section of stock returns

Jangkoo Kang, Tong Suk Kim, Changjun Lee and Byoung-Kyu Min

Journal of Banking & Finance, 2011, vol. 35, issue 12, 3158-3173

Abstract: We develop a conditional version of the consumption capital asset pricing model (CCAPM) using the conditioning variable from the cointegrating relation among macroeconomic variables (dividend yield, term spread, default spread, and short-term interest rate). Our conditioning variable has a strong power to predict market excess returns in the presence of competing predictive variables. In addition, our conditional CCAPM performs approximately as well as Fama and French’s (1993) three-factor model in explaining the cross-section of the Fama and French 25 size and book-to-market sorted portfolios. Our specification shows that value stocks are riskier than growth stocks in bad times, supporting the risk-based story.

Keywords: Asset pricing; Macroeconomic variable; Stock return predictability; Consumption capital asset pricing model; Value premium (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (21)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:35:y:2011:i:12:p:3158-3173

DOI: 10.1016/j.jbankfin.2011.04.012

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