Macroeconomic Risk and the Cross-Section of Stock Returns

54 Pages Posted: 18 Feb 2009 Last revised: 21 Sep 2014

See all articles by Jangkoo Kang

Jangkoo Kang

College of Business, Korea Advanced Institute of Science and Technology (KAIST)

Tong Suk Kim

College of Business, Korea Advanced Institute of Science and Technology (KAIST)

ChangJun Lee

KAIST Business School

Byoung-Kyu Min

Hanyang University

Multiple version iconThere are 3 versions of this paper

Date Written: April 19, 2011

Abstract

We develop a conditional version of the consumption CAPM using the conditioning variable derived from the cointegrated relationship among macroeconomic variables (dividend yield, term spread, default spread, and short-term interest rate). Our conditioning variable has a strong power to predict market excess returns in the presence of the competing predictive variables. In addition, our conditional consumption CAPM performs as well as the Fama and French (1993) three-factor model in explaining the cross-section of the Fama and French 25 size and book-to-market sorted portfolios. Our specification shows that value stocks are riskier than growth stocks in bad times supporting the risk-based story.

Keywords: Asset pricing, Macroeconomic variable, Stock return predictability, Consumption capital asset pricing model, Value premium

JEL Classification: G12

Suggested Citation

Kang, Jangkoo and Kim, Tong Suk and Lee, ChangJun and Min, Byoung-Kyu, Macroeconomic Risk and the Cross-Section of Stock Returns (April 19, 2011). Journal of Banking and Finance, Vol. 35, No. 12, 2011, Available at SSRN: https://ssrn.com/abstract=1344134 or http://dx.doi.org/10.2139/ssrn.1344134

Jangkoo Kang

College of Business, Korea Advanced Institute of Science and Technology (KAIST) ( email )

85 Hoegiro, Dongdaemoon-gu
Seoul 02455
Korea, Republic of (South Korea)
+82 2 958 3521 (Phone)

Tong Suk Kim

College of Business, Korea Advanced Institute of Science and Technology (KAIST) ( email )

85 Hoegiro, Dongdaemoon-gu
Seoul 02455
Korea, Republic of (South Korea)

ChangJun Lee (Contact Author)

KAIST Business School ( email )

Hoegiro, Dongdaemoon-gu
Seoul, 130-722
Korea
+82-2-958-3693 (Phone)

Byoung-Kyu Min

Hanyang University ( email )

Seoul
Korea, Republic of (South Korea)

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