Risk and Valuation under an Intertemporal Capital Asset Pricing Model
AbstractWe 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.
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Bibliographic InfoArticle provided by University of Chicago Press in its journal Journal of Business.
Volume (Year): 79 (2006)
Issue (Month): 1 (January)
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Web page: http://www.journals.uchicago.edu/JB/
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- Maio, Paulo & Santa-Clara, Pedro, 2012. "Multifactor models and their consistency with the ICAPM," Journal of Financial Economics, Elsevier, vol. 106(3), pages 586-613.
- Santos, Tano & Veronesi, Pietro, 2010. "Habit formation, the cross section of stock returns and the cash-flow risk puzzle," Journal of Financial Economics, Elsevier, vol. 98(2), pages 385-413, November.
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