IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Cash flow and discount rate risk in up and down markets: What is actually priced?

  • Botshekan, Mahmoud
  • Kräussl, Roman
  • Lucas, André

We test whether asymmetric preferences for losses versus gains as in Ang, Chen, and Xing (2006) also affect the pricing of cash flow versus discount rate news as in Campbell and Vuolteenaho (2004). We construct a new four-fold beta decomposition, distinguishing cash flow and discount rate betas in up and down markets. Using CRSP data over 1963-2008, we find that the downside cash flow beta and downside discount rate beta carry the largest premia. We subject our result to an extensive number of robustness checks. Overall, downside cash flow risk is priced most consistently across different samples, periods, and return decomposition methods, and is the only component of Ø; that has significant out-of-sample predictive ability. The downside cash flow risk premium is mainly attributable to small stocks. The risk premium for large stocks appears much more driven by a compensation for symmetric, cash flow related risk. Finally, we multiply our premia estimates by average betas to compute the contribution of the different risk components to realized average returns. We find that up and down discount rate components dominate the contribution to average returns of downside cash flow risk.

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://econstor.eu/bitstream/10419/43216/1/641474318.pdf
Download Restriction: no

Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2010/20.

as
in new window

Length:
Date of creation: 2010
Date of revision:
Handle: RePEc:zbw:cfswop:201020
Contact details of provider: Postal: House of Finance, Grüneburgplatz 1, HPF H5, D-60323 Frankfurt am Main
Phone: +49 (0)69 798-30050
Fax: +49 (0)69 798-30077
Web page: http://www.ifk-cfs.de/
Email:


More information through EDIRC

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. Robert J. Shiller & John Y. Campbell, 1986. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," Cowles Foundation Discussion Papers 812, Cowles Foundation for Research in Economics, Yale University.
  2. Andrew Ang & Joseph Chen & Yuhang Xing, 2005. "Downside Risk," NBER Working Papers 11824, National Bureau of Economic Research, Inc.
  3. Viral V. Acharya & Lasse Heje Pedersen, 2004. "Asset Pricing with Liquidity Risk," NBER Working Papers 10814, National Bureau of Economic Research, Inc.
  4. Long Chen & Xinlei Zhao, 2009. "Return Decomposition," Review of Financial Studies, Society for Financial Studies, vol. 22(12), pages 5213-5249, December.
  5. John Y. Campbell & Christopher Polk & Tuomo Vuolteenaho, 2005. "Growth or Glamour? Fundamentals and Systematic Risk in Stock Returns," NBER Working Papers 11389, National Bureau of Economic Research, Inc.
  6. Fama, Eugene F & French, Kenneth R, 1996. " Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
  7. Engsted, Tom & Pedersen, Thomas Q. & Tanggaard, Carsten, 2012. "Pitfalls in VAR based return decompositions: A clarification," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1255-1265.
  8. 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.
  9. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  10. John H. Cochrane, 2006. "The Dog That Did Not Bark: A Defense of Return Predictability," NBER Working Papers 12026, National Bureau of Economic Research, Inc.
  11. Donald W.K. Andrews, 1988. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Cowles Foundation Discussion Papers 877R, Cowles Foundation for Research in Economics, Yale University, revised Jul 1989.
  12. John Y. Campbell & Stefano Giglio & Christopher Polk, 2010. "Hard Times," NBER Working Papers 16222, National Bureau of Economic Research, Inc.
    • Campbell, John Y. & Giglio, Stefano & Polk, Christopher, 2013. "Hard Times," Scholarly Articles 12172786, Harvard University Department of Economics.
  13. Long Chen & Zhi Da & Xinlei Zhao, 2013. "What Drives Stock Price Movements?," Review of Financial Studies, Society for Financial Studies, vol. 26(4), pages 841-876.
  14. Campbell, John Y, 1991. "A Variance Decomposition for Stock Returns," Economic Journal, Royal Economic Society, vol. 101(405), pages 157-79, March.
  15. Hogan, William W. & Warren, James M., 1974. "Toward the Development of an Equilibrium Capital-Market Model Based on Semivariance," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 9(01), pages 1-11, January.
  16. Lettau, Martin & Ludvigson, Sydney, 1999. "Consumption, Aggregate Wealth and Expected Stock Returns," CEPR Discussion Papers 2223, C.E.P.R. Discussion Papers.
  17. Gibbons, Michael R., 1982. "Multivariate tests of financial models : A new approach," Journal of Financial Economics, Elsevier, vol. 10(1), pages 3-27, March.
  18. Campbell R. Harvey & Akhtar Siddique, 2000. "Conditional Skewness in Asset Pricing Tests," Journal of Finance, American Finance Association, vol. 55(3), pages 1263-1295, 06.
  19. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
  20. Ekaterini Panopoulou & Koubouros, M. & Malliaropulos, D., 2005. "Long-Run Cash-Flow and Discount-Rate Risks in the Cross-Section of US Returns," Economics, Finance and Accounting Department Working Paper Series n1580505, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
  21. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-36, May-June.
  22. Bawa, Vijay S. & Lindenberg, Eric B., 1977. "Capital market equilibrium in a mean-lower partial moment framework," Journal of Financial Economics, Elsevier, vol. 5(2), pages 189-200, November.
  23. Paulo Maio, 2007. "ICAPM with time-varying risk aversion," Money Macro and Finance (MMF) Research Group Conference 2006 111, Money Macro and Finance Research Group.
  24. John H. Cochrane, 1992. "Explaining the Variance of Price Dividend Ratios," NBER Working Papers 3157, National Bureau of Economic Research, Inc.
  25. Harlow, W. V. & Rao, Ramesh K. S., 1989. "Asset Pricing in a Generalized Mean-Lower Partial Moment Framework: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(03), pages 285-311, September.
  26. Friend, Irwin & Westerfield, Randolph, 1980. " Co-Skewness and Capital Asset Pricing," Journal of Finance, American Finance Association, vol. 35(4), pages 897-913, September.
  27. 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.
  28. Bawa, Vijay S. & Lindenberg, Eric B., 1977. "Abstract: Capital Market Equilibrium in a Mean-Lower Partial Moment Framework," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(04), pages 635-635, November.
  29. 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.
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:zbw:cfswop:201020. 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: (ZBW - German National Library of Economics)

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.