Long-Run Cash-Flow and Discount-Rate Risks in the Cross-Section of US Returns

Michail Koubouros, Dimitrios Malliaropulos and Ekaterini Panopoulou

Finance from University Library of Munich, Germany

Abstract: 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: 2005-05-08, Revised 2006-01-17
New Economics Papers: this item is included in nep-rmg
Note: Type of Document - pdf; pages: 42
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Citations: View citations in EconPapers (4)

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Related works:
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:0505009

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