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

  • Michail Koubouros

    (Department of Economics University of Peloponnese)

  • Dimitrios Malliaropulos

    (Department of Banking and Financial Management University of Piraeus and EFG-Eurobank)

  • Ekaterini Panopoulou

    (Department of Economics National University of Ireland Maynooth)

This paper decomposes the overall market beta of common stocks into four parts reflecting uncertainty related to the long-run dynamics of stock- specific and market-wide cash flows and discount rates. We employ a discrete time version of Merton�s Intertemporal CAPM to test whether these four sources of risk command different risk prices. The model performs well in pricing average returns on single- and double- sorted portfolios according to size, book-to-market, dividend-price ratios and past risk. It generates high estimates for the explained cross-sectional variation in average returns, lower average pricing errors than the Fama-French three factor model and economically and statistically acceptable estimates for the coefficient of relative risk aversion.

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Paper provided by EconWPA in its series Finance with number 0505009.

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Length: 42 pages
Date of creation: 08 May 2005
Date of revision: 17 Jan 2006
Handle: RePEc:wpa:wuwpfi:0505009
Note: Type of Document - pdf; pages: 42
Contact details of provider: Web page: http://econwpa.repec.org

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  4. McQueen, Grant & Pinegar, Michael & Thorley, Steven, 1996. " Delayed Reaction to Good News and the Cross-Autocorrelation of Portfolio Returns," Journal of Finance, American Finance Association, vol. 51(3), pages 889-919, July.
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  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. 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.
  19. 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.
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