Cash-Flow Risk, Discount Risk, and the Value Premium

Topics:
Investment and Capital Markets,
Risk Analysis and Management
Tags:
Capital Asset Pricing Model,
National Bureau Of Economic Research
Source:
National Bureau of Economic Research

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Overview: Habit persistence, general equilibrium model with multiple assets matches both the time series properties of the market portfolio and the cross-sectional predictability of returns on price sorted portfolios, the value premium. Consistent with empirical evidence, the paper depicts about a model which shows that value stocks are those with higher cash-flow risk; the size of the value premium is larger in "Bad Times," due to time variation in risk preferences; the unconditional Capital Asset Pricing Model (CAPM) fails, because of general equilibrium restrictions on the market portfolio. The dynamic nature of the value premium rationalizes why the conditional CAPM and a Fama and French (1993) HML factor outperform the unconditional CAPM.

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Format: PDF | Size: 475KB | Date: Dec 2005 | Pages: 59

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