Contingent Claim-Based Expected Stock Returns

AFA 2014 Philadelphia, US

EFA 2013 Cambridge, UK;

62 Pages Posted: 11 Mar 2012 Last revised: 5 Nov 2018

See all articles by Zhiyao Chen

Zhiyao Chen

The Chinese University of Hong Kong (CUHK) - Department of Finance

Ilya A. Strebulaev

Stanford University - Graduate School of Business; National Bureau of Economic Research

Date Written: March 13, 2013

Abstract

We develop and test a parsimonious contingent claims model for cross-sectional returns of stock portfolios formed on market leverage, book-to-market equity, asset growth rate, and equity size. Since stocks are residual claims on firms' assets that generate operating cash flows, stock returns are cash flow rates scaled by the sensitivities of stocks to cash flows. Our model performs well because the stock-cash flow sensitivities contain economic information. Value stocks, high-leverage stocks and low-asset-growth stocks are more sensitive to cash flows than growth stocks, low-leverage stocks and high-asset-growth stocks, particularly in recessions when default probabilities are high.

Keywords: asset pricing anomalies, stock returns, continuous time contingent claim model, structural estimation, GMM, default probability

JEL Classification: G12, G13

Suggested Citation

Chen, Zhiyao and Strebulaev, Ilya A., Contingent Claim-Based Expected Stock Returns (March 13, 2013). EFA 2013 Cambridge, UK; . Available at SSRN: https://ssrn.com/abstract=2018320 or http://dx.doi.org/10.2139/ssrn.2018320

Zhiyao Chen (Contact Author)

The Chinese University of Hong Kong (CUHK) - Department of Finance ( email )

Shatin, N.T.
Hong Kong

Ilya A. Strebulaev

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

HOME PAGE: http://faculty-gsb.stanford.edu/strebulaev/

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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