Cross section of equity returns and assets’ fundamental cash-flow risk

V. Galsband

Research output: Contribution to JournalArticleAcademicpeer-review


The decomposition of consumption beta into a component driven by assets' cash-flow news and one related to assets' discount-rate news reveals that macroeconomic risks embodied in cash flows largely account for the cross-sectional dynamics of average stock returns. Empirically, we find that differences in expected excess returns between low book-to-market and high book-to-market portfolios are associated with differences in their cash-flow betas, and thus reflect macroeconomic, especially consumption-related risks. This result holds true for a broad set of consumption-based asset pricing models. In addition, the results indicate that the risk premium on equity markets is primarily driven by the exposure of assets' cash-flow components to the cyclical variability of durable consumption goods. © 2010 Swiss Society for Financial Market Research.
Original languageEnglish
Pages (from-to)327-351
JournalFinancial Markets and Portfolio Management
Issue number4
Publication statusPublished - 2010

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