Why is long-horizon [equity] less risky?

a duration-based explanation of the value premium

Why is long-horizon [equity] less risky?
Martin Lettau, Martin Lettau
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Last edited by MARC Bot
December 13, 2020 | History

Why is long-horizon [equity] less risky?

a duration-based explanation of the value premium

"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.

Publish Date
Language
English
Pages
37

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Book Details


Edition Notes

"February 2005."

Includes bibliographical references (p. 34-[38]).

Also available in PDF from the NBER world wide web site (www.nber.org).

Published in
Cambridge, Mass
Series
NBER working paper series -- working paper 11144., Working paper series (National Bureau of Economic Research) -- working paper no. 11144.
Other Titles
Why is long-horizon less risky.

The Physical Object

Pagination
37, [22] p. :
Number of pages
37

ID Numbers

Open Library
OL17626042M
OCLC/WorldCat
58533243

Source records

Oregon Libraries MARC record

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History

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December 13, 2020 Edited by MARC Bot import existing book
November 28, 2012 Edited by AnandBot Fixed spam edits.
November 23, 2012 Edited by 62.109.5.119 Edited without comment.
December 3, 2010 Edited by Open Library Bot Added subjects from MARC records.
December 10, 2009 Created by WorkBot add works page