IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

The cross-section of equity returns and assets’ fundamental cash-flow risk

  • Victoria Galsband

    ()

Registered author(s):

    The decomposition of consumption beta into a component driven by assets’ cash-flow news and one related to assets’ discount-rate news reveals that macroeconomic risks embodied in cash flows largely account for the cross-sectional dynamics of average stock returns. Empirically, we find that differences in expected excess returns between low book-to-market and high book-to-market portfolios are associated with differences in their cash-flow betas, and thus reflect macroeconomic, especially consumption-related risks. This result holds true for a broad set of consumption-based asset pricing models. In addition, the results indicate that the risk premium on equity markets is primarily driven by the exposure of assets’ cash-flow components to the cyclical variability of durable consumption goods. Copyright Swiss Society for Financial Market Research 2010

    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://hdl.handle.net/10.1007/s11408-010-0140-z
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by Springer & Swiss Society for Financial Market Research in its journal Financial Markets and Portfolio Management.

    Volume (Year): 24 (2010)
    Issue (Month): 4 (December)
    Pages: 327-351

    as
    in new window

    Handle: RePEc:kap:fmktpm:v:24:y:2010:i:4:p:327-351
    DOI: 10.1007/s11408-010-0140-z
    Contact details of provider: Web page: http://www.springer.com

    Web page: http://www.fmpm.ch/

    More information through EDIRC

    Order Information: Web: http://www.springer.com/business+%26+management/journal/11408/PS2

    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. Lars Peter Hansen & Ravi Jagannathan, 1994. "Assessing Specification Errors in Stochastic Discount Factor Models," NBER Technical Working Papers 0153, National Bureau of Economic Research, Inc.
    2. Yacine Aït-Sahalia & Jonathan A. Parker & Motohiro Yogo, 2004. "Luxury Goods and the Equity Premium," Journal of Finance, American Finance Association, vol. 59(6), pages 2959-3004, December.
    3. Cochrane, John H, 1996. "A Cross-Sectional Test of an Investment-Based Asset Pricing Model," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 572-621, June.
    4. Paul Söderlind, 2006. "C-CAPM Refinements and the Cross-Section of Returns," University of St. Gallen Department of Economics working paper series 2006 2006-07, Department of Economics, University of St. Gallen.
    5. Masao Ogaki & Carmen M. Reinhart, 1998. "Measuring Intertemporal Substitution: The Role of Durable Goods," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 1078-1098, October.
    6. Campbell, John Y, 1991. "A Variance Decomposition for Stock Returns," Economic Journal, Royal Economic Society, vol. 101(405), pages 157-79, March.
    7. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
    8. Donald B. Keim & Robert F. Stambaugh, . "Predicting Returns in the Stock and Bond Markets," Rodney L. White Center for Financial Research Working Papers 15-85, Wharton School Rodney L. White Center for Financial Research.
    9. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    10. Campbell, John Y. & Mei, Jianping, 1993. "Where Do Betas Come From? Asset Price Dynamics and the Sources of Systematic Risk," Scholarly Articles 3353757, Harvard University Department of Economics.
    11. Breeden, Douglas T., 1979. "An intertemporal asset pricing model with stochastic consumption and investment opportunities," Journal of Financial Economics, Elsevier, vol. 7(3), pages 265-296, September.
    12. Fama, Eugene F. & French, Kenneth R., 1989. "Business conditions and expected returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 25(1), pages 23-49, November.
    13. Ravi Jagannathan & Zhenyu Wang, 1996. "The conditional CAPM and the cross-section of expected returns," Staff Report 208, Federal Reserve Bank of Minneapolis.
    14. Daniel, Kent & Marshall, David, 1997. "Equity-Premium And Risk-Free-Rate Puzzles At Long Horizons," Macroeconomic Dynamics, Cambridge University Press, vol. 1(02), pages 452-484, June.
    Full references (including those not matched with items on IDEAS)

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

    When requesting a correction, please mention this item's handle: RePEc:kap:fmktpm:v:24:y:2010:i:4:p:327-351. 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: (Sonal Shukla)

    or (Rebekah McClure)

    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.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.