 Pricing assets with stochastic cash-flow growthAssaf Eisdorfer and Carmelo Giaccotto Quantitative Finance, 2014, vol. 14, issue 6, 1005-1017 Abstract: We model the time series behavior of dividend growth rates, as well as the profitability rate, with a variety of autoregressive moving-average processes, and use the capital asset pricing model (CAPM) to derive the appropriate discount rate. One of the most important implications of this research is that the rate of return beta changes with the time to maturity of the expected cash flow, and the degree of mean reversion displayed by the growth rate. We explore the consequences of this observation for three different strands of the literature. The first is for the value premium anomaly, the second for stock valuation and learning about long-run profitability, and the third is for the St. Petersburg paradox. One of the most surprising results is that the CAPM implies a higher rate of return beta for value stocks than growth stocks. Therefore, value stocks must have higher expected returns, and this is what is required theoretically in order to explain the well-known value premium anomaly. Date: 2014 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:taf:quantf:v:14:y:2014:i:6:p:1005-1017 Ordering information: This journal article can be ordered from DOI: 10.1080/14697688.2012.708429 Access Statistics for this article Quantitative Finance is currently edited by Michael Dempster and Jim Gatheral More articles in Quantitative Finance from Taylor & Francis Journals |
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