TY - JOUR
T1 - Cash Flow and Discount Rate Risk in Up and Down Markets: What is actually priced?
AU - Botshekan, M.
AU - Kraeussl, R.G.W.
AU - Lucas, A.
PY - 2012
Y1 - 2012
N2 - We test whether asymmetric preferences for losses versus gains affect the prices of cash flow versus discount rate risk. We construct a return decomposition distinguishing cash flow and discount rate betas in up and down markets. Using U.S. data, we find that downside cash flow and discount rate betas carry the largest premia. Downside cash flow risk is priced consistently across different samples, periods, and return decomposition methods. It is the only component of beta with significant out-of-sample predictive ability. Downside cash flow premia mainly occur for small stocks, while large stocks are compensated for symmetric cash-flow-related risk. Copyright © Michael G. Foster School of Business, University of Washington 2012.
AB - We test whether asymmetric preferences for losses versus gains affect the prices of cash flow versus discount rate risk. We construct a return decomposition distinguishing cash flow and discount rate betas in up and down markets. Using U.S. data, we find that downside cash flow and discount rate betas carry the largest premia. Downside cash flow risk is priced consistently across different samples, periods, and return decomposition methods. It is the only component of beta with significant out-of-sample predictive ability. Downside cash flow premia mainly occur for small stocks, while large stocks are compensated for symmetric cash-flow-related risk. Copyright © Michael G. Foster School of Business, University of Washington 2012.
U2 - 10.1017/S0022109012000567
DO - 10.1017/S0022109012000567
M3 - Article
SN - 0022-1090
VL - 47
SP - 1279
EP - 1301
JO - Journal of Financial and Quantitative Analysis
JF - Journal of Financial and Quantitative Analysis
IS - 6
ER -