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Book/Printed Material Why is long-horizon equity less risky? a duration-based explanation of the value premium

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Title

  • Why is long-horizon equity less risky? a duration-based explanation of the value premium

Summary

  • "This paper proposes a dynamic risk-based model that captures the high expected returns on value stocks relative to growth stocks, and the failure of the capital asset pricing model to explain these expected returns. To model the difference between value and growth stocks, we introduce a cross-section of long-lived firms distinguished by the timing of their cash flows. Firms with cash flows weighted more to the future have high price ratios, while firms with cash flows weighted more to the present have low price ratios. We model how investors perceive the risks of these cash flows by specifying a stochastic discount factor for the economy. The stochastic discount factor implies that shocks to aggregate dividends are priced, but that shocks to the time-varying price of risk are not. As long-horizon equity, growth stocks covary more with this time-varying price of risk than value stocks, which covary more with shocks to cash flows. When the model is calibrated to explain aggregate stock market behavior, we find that it can also account for the observed value premium, the high Sharpe ratios on value stocks relative to growth stocks, and the outperformance of value (and underperformance of growth) relative to the CAPM"--National Bureau of Economic Research web site.

Names

  • Lettau, Martin, 1966-
  • Wachter, Jessica
  • National Bureau of Economic Research

Created / Published

  • Cambridge, MA : National Bureau of Economic Research, c2005.

Headings

  • -  Corporations--Valuation--Mathematical models
  • -  Investments--Mathematical models
  • -  Rate of return--Mathematical models
  • -  Risk--Mathematical models
  • -  Stocks--Mathematical models

Notes

  • -  Title from PDF file as viewed on 3/9/2005.
  • -  Includes bibliographical references.
  • -  Also available in print.
  • -  Mode of access: World Wide Web.
  • -  System requirements: Adobe Acrobat Reader.

Call Number/Physical Location

  • HB1

Digital Id

Library of Congress Control Number

  • 2005616888

Access Advisory

  • Unrestricted online access

Online Format

  • image
  • pdf

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Citations are generated automatically from bibliographic data as a convenience, and may not be complete or accurate.

Chicago citation style:

Lettau, Martin, Jessica Wachter, and National Bureau Of Economic Research. Why Is Long-Horizon Equity Less Risky? a Duration-Based Explanation of the Value Premium. Cambridge, MA: National Bureau of Economic Research, 2005. Pdf. https://aj.sunback.homes/item/2005616888/.

APA citation style:

Lettau, M., Wachter, J. & National Bureau Of Economic Research. (2005) Why Is Long-Horizon Equity Less Risky? a Duration-Based Explanation of the Value Premium. Cambridge, MA: National Bureau of Economic Research. [Pdf] Retrieved from the Library of Congress, https://aj.sunback.homes/item/2005616888/.

MLA citation style:

Lettau, Martin, Jessica Wachter, and National Bureau Of Economic Research. Why Is Long-Horizon Equity Less Risky? a Duration-Based Explanation of the Value Premium. Cambridge, MA: National Bureau of Economic Research, 2005. Pdf. Retrieved from the Library of Congress, <aj.sunback.homes/item/2005616888/>.