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Author: Zhi Da Publisher: ISBN: Category : Languages : en Pages : 68
Book Description
This paper directly links the risk premium on an asset to two characteristics of its underlying cash flow: cash flow covariance with aggregate consumption; and cash flow duration, which measures the temporal pattern of the cash flow. Their impact on the cross-sectional variation of risk premia can be largely captured by a two-factor cash flow model. While cash flow covariance is of first-order importance in explaining the cross-sectional variation of risk premia, cash flow duration still provides additional explanatory power through a second-order interaction term. Cash flow duration is particularly important in explaining the value premium given as value and growth stocks have significantly different durations. Empirically, I measure both cash flow characteristics using only consumption and accounting data. I show that the two-factor cash flow model is able to explain 82% of the cross-sectional variation in returns on size or book-to-market sorted stock portfolios.
Author: Zhi Da Publisher: ISBN: Category : Languages : en Pages : 68
Book Description
This paper directly links the risk premium on an asset to two characteristics of its underlying cash flow: cash flow covariance with aggregate consumption; and cash flow duration, which measures the temporal pattern of the cash flow. Their impact on the cross-sectional variation of risk premia can be largely captured by a two-factor cash flow model. While cash flow covariance is of first-order importance in explaining the cross-sectional variation of risk premia, cash flow duration still provides additional explanatory power through a second-order interaction term. Cash flow duration is particularly important in explaining the value premium given as value and growth stocks have significantly different durations. Empirically, I measure both cash flow characteristics using only consumption and accounting data. I show that the two-factor cash flow model is able to explain 82% of the cross-sectional variation in returns on size or book-to-market sorted stock portfolios.
Author: Federal Reserve Federal Reserve Board Publisher: CreateSpace ISBN: 9781511918596 Category : Languages : en Pages : 42
Book Description
Solutions to the equity premium puzzle should inform us about the cross-section of stock returns. An external habit model with heterogeneous firms reproduces numerous stylized facts about both the equity premium and the value premium. The equity premium is large, time-varying, and linked with consumption volatility. The cross-section of expected returns is log-linear in B/M, and the slope matches the data. The explanation for the value pre-mium lies in the interaction between the cross-section of cash flows and the time-varying risk premium. Value firms are temporarily low produc-tivity firms, which will eventually experience high cash flows. The present value of these temporally distant cash flows is sensitive to risk premium movements. The value premium is the reward for bearing this sensitivity. Empirical evidence verifies that value firms have higher cash-flow growth. The data also show that value stock returns are more sensitive to risk premium movements, as measured by consumption volatility shocks.
Author: Mariano M. Croce Publisher: ISBN: Category : Assets (Accounting) Languages : en Pages : 44
Book Description
We study the role of information in asset pricing models with long-run cash flow risk. To illustrate the importance of the information structure, we show how the implications of the long-run risk paradigm for the cross-sectional properties of stock returns and cash flow duration are affected by information. When investors can fully distinguish short- and long- run consumption risk components of dividend growth innovations (full information), only exposure to long-run consumption risk generates significant risk premia, implying that high-return value stocks are long-duration assets, contrary to the historical data. By contrast, when investors observe the change in consumption and dividends each period but not the individual components of that change (limited information), exposure to short-run risk can generate large risk premia, so that high-return value stocks are short-duration assets while low-return growth stocks are long-duration assets, as in the data. We also show that, in order to explain empirical finding that long-horizon equity is less risky than short-horizon equity, the properties of the cash flow model and the values of primitive preference parameters must be quite different from those emphasized in the existing long-run risk literature.
Author: Costis Skiadas Publisher: Princeton University Press ISBN: 1400830141 Category : Business & Economics Languages : en Pages : 363
Book Description
Asset Pricing Theory is an advanced textbook for doctoral students and researchers that offers a modern introduction to the theoretical and methodological foundations of competitive asset pricing. Costis Skiadas develops in depth the fundamentals of arbitrage pricing, mean-variance analysis, equilibrium pricing, and optimal consumption/portfolio choice in discrete settings, but with emphasis on geometric and martingale methods that facilitate an effortless transition to the more advanced continuous-time theory. Among the book's many innovations are its use of recursive utility as the benchmark representation of dynamic preferences, and an associated theory of equilibrium pricing and optimal portfolio choice that goes beyond the existing literature. Asset Pricing Theory is complete with extensive exercises at the end of every chapter and comprehensive mathematical appendixes, making this book a self-contained resource for graduate students and academic researchers, as well as mathematically sophisticated practitioners seeking a deeper understanding of concepts and methods on which practical models are built. Covers in depth the modern theoretical foundations of competitive asset pricing and consumption/portfolio choice Uses recursive utility as the benchmark preference representation in dynamic settings Sets the foundations for advanced modeling using geometric arguments and martingale methodology Features self-contained mathematical appendixes Includes extensive end-of-chapter exercises
Author: Mariano (Max) Massimiliano Croce Publisher: ISBN: Category : Languages : en Pages : 58
Book Description
We study the role of information in asset pricing models with long-run cash flow risk. To illustrate the importance of the information structure, we show how the implications of the long run risk paradigm for the cross-sectional properties of stock returns and cash flow duration are affected by information. When investors can fully distinguish short- and long-run consumption risk components of dividend growth innovations (full information), only exposure to long-run consumption risk generates significant risk premia, implying that high return value stocks are long-duration assets, contrary to the historical data. By contrast, when investors observe the change in consumption and dividends each period but not the individual components of that change (limited information), exposure to short-run risk can generate large risk premia, so that high-return value stocks are short-duration assets while low-return growth stocks are long-duration assets, as in the data. We also show that, in order to explain empirical finding that long-horizon equity is less risky than short-horizon equity, the properties of the cash flow model and the values of primitive preference parameters must be quite different from those emphasized in the existing long-run risk literature.
Author: Bingxu Chen Publisher: ISBN: Category : Languages : en Pages : 55
Book Description
Realized returns comprise (ex-ante) expected returns plus (ex-post) innovations, and consequently both expected returns and returns innovations can be broken down into components reflecting fluctuations in cash flow (CF) and discount rate (DR). I use a present-value model to identify the CF and DR risk factors which are latent from the time series and cross sections of price-dividend ratios. This setup accommodates models where CF risk dominates, like Bansal and Yaron (2004), and models where DR risk dominates, like Campbell and Cochrane (1999). I estimate the model on portfolios, which capture several of the most common cross-sectional anomalies, and decompose the expected and unexpected returns into CF and DR components along both time-series and cross-sectional dimensions. I find that (1) the DR risk is more likely to explain the variations of expected returns, (2) the CF risk drives the variations of unexpected returns, and (3) together they account for over 80% of the cross-sectional variance of the average stock returns.
Author: John Y. Campbell Publisher: ISBN: Category : Stocks Languages : en Pages : 66
Book Description
The cash flows of growth stocks are particularly sensitive to temporary movements in aggregate stock prices (driven by movements in the equity risk premium), while the cash flows of value stocks are particularly sensitive to permanent movements in aggregate stock prices (driven by market-wide shocks to cash flows.) Thus the high betas of growth stocks with the market's discount-rate shocks, and of value stocks with the market's cash-flow shocks, are determined by the cash-flow fundamentals of growth and value companies. Growth stocks are not merely "glamour stocks" whose systematic risks are purely driven by investor sentiment. More generally, accounting measures of firm-level risk have predictive power for firms' betas with market-wide cash flows, and this predictive power arises from the behavior of firms' cash flows. The systematic risks of stocks with similar accounting characteristics are primarily driven by the systematic risks of their fundamentals.
Author: Mathias Külpmann Publisher: Springer Science & Business Media ISBN: 9783540140078 Category : Business & Economics Languages : en Pages : 268
Book Description
Mathias Külpmann presents a framework to evaluate whether the stock market is in line with underlying fundamentals. The new and revised edition offers an up to date introduction to the controversy between rational asset pricing and behavioural finance. Empirical evidence of stock market overreaction are investigated within the paradigms of rational asset pricing and behavioural finance. Although this monograph will not promise the reader to become a millionaire, it offers a road to obtain a deeper understanding of the forces which drive stock returns. It should be of interest to anyone interested in what drives performance in the stock market.
Author: Zhi Da
Author: Zhi Da
Author: Andrew Y. Chen
Author: Federal Reserve Federal Reserve Board
Author: Mariano M. Croce
Author: Costis Skiadas
Author: Mariano (Max) Massimiliano Croce
Author: Bingxu Chen
Author: John Y. Campbell
Author: John H. Cochrane
Author: Mathias Külpmann