Cross-Sectional Asset Pricing Puzzles: A Long-Run Perspective
71 Pages Posted: 12 Dec 2008 Last revised: 29 Nov 2011
Date Written: November 23, 2011
This paper proposes an intertemporal asset pricing model within a long-run risk economy featuring a formal cross section of firms characterized by mean-reverting expected dividend growth. We find considerable empirical support for the cross-sectional implications of the model, as cash flow- and return-based measures of long-run risk exposure are both positively related to returns and offer a partial explanation of the size, value, and momentum anomalies. Interestingly, the model implies a negative relation between exposures to systematic and firm-specific risks in the cross section. Higher cash-flow duration firms exhibit higher exposure to economic growth shocks while they are less sensitive to firm-specific news. Such firms command higher risk premiums but exhibit lower analyst forecast dispersion, idiosyncratic volatility, and distress risk. We find theoretical and empirical support of a long-run risk explanation of these anomalies.
JEL Classification: G10, G12
Suggested Citation: Suggested Citation