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Long-Run Cash-Flow and Discount-Rate Risks in the Cross-Section of US Returns

  • Ekaterini Panopoulou

    (Department of Economics, National University of Ireland, Maynooth)

  • Koubouros, M.

    ()

    (University of Peloponnese, Department of Economics, Greece)

  • Malliaropulos, D.

    (Department of Banking and Financial Management, University of Piraeus, and National Bank of)

This paper decomposes the overall market (CAPM) risk into parts re.ecting uncertainty related to the long-run dynamics of portfolio-speci.c and market cash .ows and discount rates. We decompose market betas into four sub-betas (as- sociated with assets.and market.s cash .ows and discount rates) and we employ a discrete time version of the I-CAPM to derive a four-beta model. The model performs well in pricing average returns on single- and double-sorted portfolios ac- cording to size, book-to-market, dividend-price ratios and past risk, by producing high estimates for the explained cross-sectional variation in average returns and economically and statistically acceptable estimates for the coe¢ cient of relative risk aversion.

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Paper provided by Department of Economics, Finance and Accounting, National University of Ireland - Maynooth in its series Economics, Finance and Accounting Department Working Paper Series with number n1580505.

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Length: 32 pages
Date of creation: May 2005
Date of revision:
Handle: RePEc:may:mayecw:n1580505
Contact details of provider: Postal: Maynooth, Co. Kildare
Phone: 353-1-7083728
Fax: 353-1-7083934
Web page: http://www.maynoothuniversity.ie/economics-finance-and-accounting

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  5. Campbell, John & Vuolteenaho, Tuomo, 2004. "Bad Beta, Good Beta," Scholarly Articles 3122489, Harvard University Department of Economics.
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  10. Scholes, Myron & Williams, Joseph, 1977. "Estimating betas from nonsynchronous data," Journal of Financial Economics, Elsevier, vol. 5(3), pages 309-327, December.
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  12. 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.
  13. Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, vol. 57(4), pages 937-69, July.
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  15. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, 09.
  16. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
  17. Eugene F. Fama & Kenneth R. French, 2004. "The Capital Asset Pricing Model: Theory and Evidence," Journal of Economic Perspectives, American Economic Association, vol. 18(3), pages 25-46, Summer.
  18. Kent Daniel & Sheridan Titman, 1996. "Evidence on the Characteristics of Cross Sectional Variation in Stock Returns," NBER Working Papers 5604, National Bureau of Economic Research, Inc.
  19. Fama, Eugene F. & French, Kenneth R., 1988. "Dividend yields and expected stock returns," Journal of Financial Economics, Elsevier, vol. 22(1), pages 3-25, October.
  20. Epstein, Larry G & Zin, Stanley E, 1991. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: An Empirical Analysis," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 263-86, April.
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