Long-Run Cash-Flow and Discount-Rate Risks in the Cross-Section of US Returns
Dimitrios Malliaropulos () and
Ekaterini Panopoulou ()
Finance from University Library of Munich, Germany
This paper decomposes the overall market beta of common stocks into four parts reflecting uncertainty related to the long-run dynamics of stock- specific and market-wide cash flows and discount rates. We employ a discrete time version of Merton’s Intertemporal CAPM to test whether these four sources of risk command different risk prices. The model performs well in pricing average returns on single- and double-sorted portfolios according to size, book-to-market, dividend-price ratios and past risk. It generates high estimates for the explained cross-sectional variation in average returns, lower average pricing errors than the Fama-French three factor model and economically and statistically acceptable estimates for the coefficient of relative risk aversion.
Keywords: CAPM; cash-flow risk; discount-rate risk; asset pricing (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2005-03-11, Revised 2006-01-17
New Economics Papers: this item is included in nep-fin
Note: Type of Document - pdf; pages: 42
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Journal Article: Long-run cash flow and discount-rate risks in the cross-section of US returns (2010)
Working Paper: Long-Run Cash-Flow and Discount-Rate Risks in the Cross-Section of US Returns (2006)
Working Paper: Long-Run Cash-Flow and Discount-Rate Risks in the Cross-Section of US Returns (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpfi:0503014
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