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Macroeconomic risk and the cross-section of stock returns

  • Kang, Jangkoo
  • Kim, Tong Suk
  • Lee, Changjun
  • Min, Byoung-Kyu
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    We develop a conditional version of the consumption capital asset pricing model (CCAPM) using the conditioning variable from the cointegrating relation among macroeconomic variables (dividend yield, term spread, default spread, and short-term interest rate). Our conditioning variable has a strong power to predict market excess returns in the presence of competing predictive variables. In addition, our conditional CCAPM performs approximately as well as Fama and French’s (1993) three-factor model in explaining the cross-section of the Fama and French 25 size and book-to-market sorted portfolios. Our specification shows that value stocks are riskier than growth stocks in bad times, supporting the risk-based story.

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    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 35 (2011)
    Issue (Month): 12 ()
    Pages: 3158-3173

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    Handle: RePEc:eee:jbfina:v:35:y:2011:i:12:p:3158-3173
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