Investor Information, Long-Run Risk, and the Duration fo Risky Assets
AbstractValue stocks have higher average returns than growth stocks. At the same time, the duration of value stocks' cash flows is considerably shorter than that of growth stocks. We show that when investors can fully distinguish short- and long-run consumption risk components of dividend growth innovations, only exposure to long-run consumption risk generates significant risk premia, implying that high-return value stocks should be long-duration assets, contrary to the historical data. By contrast, when investors observe the change in consumption and dividends each period but not the individual components of that change (limited information), exposure to short-run risk can generate large risk premia, implying that value stocks become short-duration assets while growth stocks are long-duration assets, as in the data. The limited information specifications we explore are not only consistent with the cash flow duration properties of value and growth stocks, they also explain the observed value premium, the higher Sharpe ratios of value stocks, the failure of the CAPM to account for the value premium, and the success of the HML factor of Fama and French (1993) in explaining the value premium.
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 628.
Date of creation: 03 Dec 2006
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Web page: http://www.EconomicDynamics.org/society.htm
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Information; Long-Run Risk; Value Premium;
Find related papers by JEL classification:
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
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- NEP-ALL-2007-01-13 (All new papers)
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- Jules H. van Binsbegen & Michael W. Brandt & Ralph S.J. Koijen, 2010.
"On the Timing and Pricing of Dividends,"
2010-010, Becker Friedman Institute for Research In Economics.
- Jules H. van Binsbergen & Michael W. Brandt & Ralph S.J. Koijen, 2010. "On the Timing and Pricing of Dividends," NBER Working Papers 16455, National Bureau of Economic Research, Inc.
- Jules H. van Binsbergen & Michael W. Brandt & Ralph S.J. Koijen, . "On the Timing and Pricing of Dividends," Swiss Finance Institute Research Paper Series 11-13, Swiss Finance Institute.
- Lars Peter Hansen, 2007. "Beliefs, Doubts and Learning: Valuing Economic Risk," NBER Working Papers 12948, National Bureau of Economic Research, Inc.
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