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The Cross Section of Expected Returns and Amortized Spreads

  • Zhongzhi (Lawrence) He

    ()

    (Faculty of Business, Brock University, 500 Glenridge Ave., St. Catharines, ON, Canada, L2S 3A1, Canada)

  • Lawrence Kryzanowski

    ()

    (John Molson School of Business, Concordia University, 1455 De Maisonneuve Blvd. West, Montreal, QC, Canada, H3G 1M8, Canada)

Registered author(s):

    The cross-sectional relationship between expected returns and amortized spreads is studied in an overlapping-generations economy with an average investor. The commonality in liquidity is directly incorporated into the asset-pricing relation. In a static equilibrium, the amortized spread of an asset is related to its expected return through four channels; namely: the equilibrium zero-beta rate, the market risk premium, a level effect, and an incremental sensitivity effect. Although both are present over the entire period, their relative importance shifts from a significant level to a significant sensitivity effect from the earlier to most recent sub-period in the Canadian stock market.

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    Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal Review of Pacific Basin Financial Markets and Policies.

    Volume (Year): 09 (2006)
    Issue (Month): 04 ()
    Pages: 597-638

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    Handle: RePEc:wsi:rpbfmp:v:09:y:2006:i:04:p:597-638
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