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Conditional capital asset pricing model, long-run risk, and stock valuation

Author

Listed:
  • Claude Bergeron

    (School of Business Administration, Teluq University)

  • Tov Assogbavi

    (Faculty of Management, Laurentian University)

  • Jean-pierre Gueyie

    (School of Management, University of Quebec in Montreal)

Abstract

In this note, we integrate the long-run concept of risk into the stock valuation process, using the conditional capital asset pricing model. Our main result indicates that the intrinsic value of a stock is positively related to its long-run dividend growth rate, and negatively related to its long-run covariance between dividends and aggregate dividends. This result suggests that the theoretical framework of the conditional capital asset pricing model can be used to examine the effect of long-run risk on firm values. This result also suggests that the long-run covariance between dividends and aggregate dividends represents a relevant measure of risk, without assuming anything about aggregate consumption.

Suggested Citation

  • Claude Bergeron & Tov Assogbavi & Jean-pierre Gueyie, 2020. "Conditional capital asset pricing model, long-run risk, and stock valuation," Economics Bulletin, AccessEcon, vol. 40(1), pages 77-86.
    • Handle: RePEc:ebl:ecbull:eb-19-01100
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    References listed on IDEAS

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    More about this item

    Keywords

    Asset pricing; CAPM; long-run risk; stock valuation; dividends;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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