Cash Flow, Consumption Risk and Cross Section of Stock Returns
نویسنده
چکیده
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 firstorder 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. ∗Kellogg School of Management, Northwestern University, 2001 Sheridan Rd, Evanston IL 60208. E-mail: [email protected]. I wish to thank Ravi Jagannathan for his continuing guidance and support. I also received helpful comments and suggestions from Torben Andersen, Ravi Bansal, Kent Daniel, Martin Eichenbaum, Paul Gao, Robert Korajczyk, Arvind Krishnamurthy, Deborah Lucas, Christian Lundblad, Robert McDonald, Christopher Polk, Ernst Schaumburg, George Skoulakis and Yong Wang. I am responsible for any errors or omissions.
منابع مشابه
Supplementary Material to “Cash Flow, Consumption Risk, and the Cross-Section of Stock Returns”
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