Cross-Sectional Asset Pricing Puzzles: A Long-Run Perspective

71 Pages Posted: 12 Dec 2008 Last revised: 29 Nov 2011

See all articles by Doron Avramov

Doron Avramov

Interdisciplinary Center (IDC) Herzliyah

Scott Cederburg

University of Arizona - Department of Finance

Satadru Hore

Federal Reserve Bank of Boston

Date Written: November 23, 2011

Abstract

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

Avramov, Doron and Cederburg, Scott and Hore, Satadru, Cross-Sectional Asset Pricing Puzzles: A Long-Run Perspective (November 23, 2011). Third Singapore International Conference on Finance 2009; AFA 2010 Atlanta Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1314869 or http://dx.doi.org/10.2139/ssrn.1314869

Doron Avramov

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

Scott Cederburg (Contact Author)

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States

Satadru Hore

Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02116
United States

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