Why Is Long-Horizon Equity Less Risky? A Duration-Based Explanation of the Value Premium
We propose a dynamic risk-based model that captures the value premium. Firms are modeled as long-lived assets distinguished by the timing of cash flows. The stochastic discount factor is specified so that shocks to aggregate dividends are priced, but shocks to the discount rate are not. The model im...
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| Veröffentlicht in: | The Journal of finance (New York) 2007-02, Vol.62 (1), p.55-92 |
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| container_end_page | 92 |
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| container_title | The Journal of finance (New York) |
| container_volume | 62 |
| creator | LETTAU, MARTIN WACHTER, JESSICA A. |
| description | We propose a dynamic risk-based model that captures the value premium. Firms are modeled as long-lived assets distinguished by the timing of cash flows. The stochastic discount factor is specified so that shocks to aggregate dividends are priced, but shocks to the discount rate are not. The model implies that growth firms covary more with the discount rate than do value firms, which covary more with cash flows. When calibrated to explain aggregate stock market behavior, the model accounts for the observed value premium, the high Sharpe ratios on value firms, and the poor performance of the CAPM. |
| doi_str_mv | 10.1111/j.1540-6261.2007.01201.x |
| format | Article |
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| ispartof | The Journal of finance (New York), 2007-02, Vol.62 (1), p.55-92 |
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| language | eng |
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| source | Wiley Online Library Journals Frontfile Complete; Jstor Complete Legacy |
| subjects | Assets CAPM Cash flow Cross-sectional analysis Discount rates Dividends Enterprises Equity Expected returns Financial portfolios Firm theory Growth stocks Investment risk Modeling Price models Price shocks Risk premiums Securities markets Standard deviation Stock prices Studies |
| title | Why Is Long-Horizon Equity Less Risky? A Duration-Based Explanation of the Value Premium |
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