Macroeconomic Risk and the Cross-Section of Stock Returns
54 Pages Posted: 18 Feb 2009 Last revised: 21 Sep 2014
There are 3 versions of this paper
Macroeconomic Risk and the Cross-Section of Stock Returns
Macroeconomic Risk and the Cross-Section of Stock Returns
Macroeconomic Risk and the Cross-Section of Stock Returns
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: Suggested Citation
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