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Risk and Valuation under an Intertemporal Capital Asset Pricing Model

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Author Info

  • Michael J. Brennan

    (Anderson Graduate School of Management, University of California, Los Angeles)

  • Yihong Xia

    (Wharton School, University of Pennsylvania)

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    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.

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    Bibliographic Info

    Article provided by University of Chicago Press in its journal Journal of Business.

    Volume (Year): 79 (2006)
    Issue (Month): 1 (January)
    Pages: 1-36

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    Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:1:p:1-36

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    Web page: http://www.journals.uchicago.edu/JB/

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    Cited by:
    1. Schröder, David & Esterer, Florian, 2012. "A new measure of equity duration: The duration-based explanation of the value premium revisited," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62077, Verein für Socialpolitik / German Economic Association.
    2. Maio, Paulo & Santa-Clara, Pedro, 2012. "Multifactor models and their consistency with the ICAPM," Journal of Financial Economics, Elsevier, Elsevier, vol. 106(3), pages 586-613.
    3. Santos, Tano & Veronesi, Pietro, 2010. "Habit formation, the cross section of stock returns and the cash-flow risk puzzle," Journal of Financial Economics, Elsevier, Elsevier, vol. 98(2), pages 385-413, November.

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