Risk and Valuation under an Intertemporal Capital Asset Pricing Model

Michael J. Brennan and Yihong Xia
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Michael J. Brennan: Anderson Graduate School of Management, University of California, Los Angeles
Yihong Xia: Wharton School, University of Pennsylvania

The Journal of Business, 2006, vol. 79, issue 1, 1-36

Abstract: We analyze the risk characteristics and valuation of assets in an economy in which the investment opportunity set is described by the real interest rate and the maximum Sharpe ratio. We show that, holding constant the beta of the underlying cash flow, the beta of a security is a function of the cash flow maturity. For parameter values estimated from U.S. data, the security beta always increases with the maturity of the underlying cash flow, while discount rates for risky cash flows can be increasing, decreasing, or nonmonotone functions of that maturity.

Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:ucp:jnlbus:v:79:y:2006:i:1:p:1-36

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