Intertemporal Market Risks and the Cross-Section of Greek Average Returns

Abstract

This paper examines whether the overall market risk, along with risks reflecting uncertainty related to the long run dynamics of market cash flows (dividends) and discount rates (returns), price average returns on single-sorted portfolios in the Greek stock market. Our results suggest that a two-beta intertemporal capital asset pricing model explains half of the cross-sectional variation in average returns and delivers an economically and statistically acceptable estimate of the coefficient of relative risk aversion. Despite the relative importance of market discount-rate risk, it is market dividend-growth risk that turns out to be far more significant in determining average returns on Greek portfolios.

Keywords: CAPM, beta, cash flow risk, discount rate risk, risk aversion

JEL Classification: G11, G12, G14