Advanced Search
MyIDEAS: Login to save this paper or follow this series

Cash-Flow Risk, Discount Risk, and the Value Premium

Contents:

Author Info

  • Tano Santos
  • Pietro Veronesi
Registered author(s):

    Abstract

    A habit persistence, general equilibrium model with multiple assets matches both the time series properties of the market portfolio and the cross-sectional predictability of returns on price sorted portfolios, the value premium. Consistent with empirical evidence, the model shows that (a) value stocks are those with higher cash-flow risk; (b) the size of the value premium is larger in %u201Cbad times,%u201D due to time variation in risk preferences; (c) the unconditional CAPM fails, because of general equilibrium restrictions on the market portfolio. The dynamic nature of the value premium rationalizes why the conditional CAPM and a Fama and French (1993) HML factor outperform the unconditional CAPM.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.nber.org/papers/w11816.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11816.

    as in new window
    Length:
    Date of creation: Dec 2005
    Date of revision:
    Handle: RePEc:nbr:nberwo:11816

    Note: AP
    Contact details of provider:
    Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Email:
    Web page: http://www.nber.org
    More information through EDIRC

    Related research

    Keywords:

    Find related papers by JEL classification:

    This paper has been announced in the following NEP Reports:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Jonathan Berk & Richard C. Green & Vasant Naik, 1998. "Optimal Investment, Growth Options, and Security Returns," NBER Working Papers 6627, National Bureau of Economic Research, Inc.
    2. John Y. Campbell & Tuomo Vuolteenaho, 2002. "Bad Beta, Good Beta," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1971, Harvard - Institute of Economic Research.
    3. Sundaresan, Suresh M, 1989. "Intertemporally Dependent Preferences and the Volatility of Consumption and Wealth," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 2(1), pages 73-89.
    4. Ferson, Wayne E. & Constantinides, George M., 1991. "Habit persistence and durability in aggregate consumption: Empirical tests," Journal of Financial Economics, Elsevier, Elsevier, vol. 29(2), pages 199-240, October.
    5. Owen Lamont, 1998. "Earnings and Expected Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 53(5), pages 1563-1587, October.
    6. Ravi Jagannathan & Zhenyu Wang, 1996. "The conditional CAPM and the cross-section of expected returns," Staff Report, Federal Reserve Bank of Minneapolis 208, Federal Reserve Bank of Minneapolis.
    7. Liew, Jimmy & Vassalou, Maria, 2000. "Can book-to-market, size and momentum be risk factors that predict economic growth?," Journal of Financial Economics, Elsevier, Elsevier, vol. 57(2), pages 221-245, August.
    8. Andrew B. Abel, . "Asset Prices Under Habit Formation and Catching Up With the Jones," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 1-90, Wharton School Rodney L. White Center for Financial Research.
    9. repec:rus:hseeco:52003 is not listed on IDEAS
    10. Jonathan Lewellen & Stefan Nagel, 2003. "The Conditional CAPM does not Explain Asset-Pricing Anamolies," NBER Working Papers 9974, National Bureau of Economic Research, Inc.
    11. Gomes, Joao F & Kogan, Leonid & Zhang, Lu, 2002. "Equilibrium Cross-Section of Returns," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3482, C.E.P.R. Discussion Papers.
    12. Erzo F. P. Luttmer, 2005. "Neighbors as Negatives: Relative Earnings and Well-Being," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 120(3), pages 963-1002, August.
    13. Ravi Bansal & Robert F. Dittmar & Christian T. Lundblad, 2005. "Consumption, Dividends, and the Cross Section of Equity Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 60(4), pages 1639-1672, 08.
    14. Fama, Eugene F. & French, Kenneth R., 1989. "Business conditions and expected returns on stocks and bonds," Journal of Financial Economics, Elsevier, Elsevier, vol. 25(1), pages 23-49, November.
    15. Martin Lettau & Sydney Ludvigson, 2001. "Resurrecting the (C)CAPM: A Cross-Sectional Test When Risk Premia Are Time-Varying," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 109(6), pages 1238-1287, December.
    16. Li, Yuming, 2001. "Expected Returns and Habit Persistence," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 14(3), pages 861-99.
    17. Randolph B. Cohen & Christopher Polk & Tuomo Vuolteenaho, 2003. "The Price is (Almost) Right," NBER Working Papers 10131, National Bureau of Economic Research, Inc.
    18. Martin Lettau & Jessica Wachter, 2005. "Why is Long-Horizon Equity Less Risky? A Duration-Based Explanation of the Value Premium," NBER Working Papers 11144, National Bureau of Economic Research, Inc.
    19. Wayne E. Ferson & Campbell R. Harvey, 1999. "Conditioning Variables and the Cross-Section of Stock Returns," NBER Working Papers 7009, National Bureau of Economic Research, Inc.
    20. Jonathan A. Parker & Christian Julliard, 2005. "Consumption Risk and the Cross Section of Expected Returns," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 113(1), pages 185-222, February.
    21. Cornell, Bradford, 1999. "Risk, Duration, and Capital Budgeting: New Evidence on Some Old Questions," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 72(2), pages 183-200, April.
    22. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, Elsevier, vol. 33(1), pages 3-56, February.
    23. John Y. Campbell & Robert J. Shiller, 1986. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," NBER Working Papers 2100, National Bureau of Economic Research, Inc.
    24. Randolph B. Cohen & Christopher Polk & Tuomo Vuolteenaho, 2001. "The Value Spread," NBER Working Papers 8242, National Bureau of Economic Research, Inc.
    25. Cochrane, John H. & Campbell, John, 1999. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Scholarly Articles 3119444, Harvard University Department of Economics.
    26. Heaton, John, 1995. "An Empirical Investigation of Asset Pricing with Temporally Dependent Preference Specifications," Econometrica, Econometric Society, Econometric Society, vol. 63(3), pages 681-717, May.
    27. Detemple, Jerome B & Zapatero, Fernando, 1991. "Asset Prices in an Exchange Economy with Habit Formation," Econometrica, Econometric Society, Econometric Society, vol. 59(6), pages 1633-57, November.
    28. Lior Menzly & Tano Santos & Pietro Veronesi, 2004. "Understanding Predictability," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 112(1), pages 1-47, February.
    29. Vassalou, Maria, 2003. "News related to future GDP growth as a risk factor in equity returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 68(1), pages 47-73, April.
    30. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, American Finance Association, vol. 19(3), pages 425-442, 09.
    31. Fama, Eugene F & French, Kenneth R, 1996. " Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, American Finance Association, vol. 51(1), pages 55-84, March.
    32. G. Constantinides, 1990. "Habit formation: a resolution of the equity premium puzzle," Levine's Working Paper Archive 1397, David K. Levine.
    33. John Campbell & Jianping Mei, 1993. "Where do Betas Come From? Asset Price Dynamics and the Sources of Systematic Risk," NBER Working Papers 4329, National Bureau of Economic Research, Inc.
    34. Tano Santos & Pietro Veronesi, 2004. "Conditional Betas," NBER Working Papers 10413, National Bureau of Economic Research, Inc.
    35. Hansen, Lars Peter & Richard, Scott F, 1987. "The Role of Conditioning Information in Deducing Testable," Econometrica, Econometric Society, Econometric Society, vol. 55(3), pages 587-613, May.
    36. Weil, Philippe, 1989. "The equity premium puzzle and the risk-free rate puzzle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 24(3), pages 401-421, November.
    37. De Bondt, Werner F M & Thaler, Richard H, 1987. " Further Evidence on Investor Overreaction and Stock Market Seasonalit y," Journal of Finance, American Finance Association, American Finance Association, vol. 42(3), pages 557-81, July.
    38. Fama, Eugene F. & French, Kenneth R., 1988. "Dividend yields and expected stock returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 22(1), pages 3-25, October.
    39. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 47(2), pages 427-65, June.
    40. Pietro Veronesi & Tano Santos, 2004. "Conditional Betas," 2004 Meeting Papers, Society for Economic Dynamics 24, Society for Economic Dynamics.
    41. Hodrick, Robert J, 1992. "Dividend Yields and Expected Stock Returns: Alternative Procedures for Inference and Measurement," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 5(3), pages 357-86.
    42. Heaton, John, 1993. "The Interaction between Time-Nonseparable Preferences and Time Aggregation," Econometrica, Econometric Society, Econometric Society, vol. 61(2), pages 353-85, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:11816. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.