Temporary and Permanent Market Risks: Some Further Evidence
Mathematical and Computer Modelling, Forthcoming
Posted: 5 Oct 2006
We study the time-series behavior of portfolio and market specific dividend-growth rates' and discount rates' components of total market risk (CAPM beta). Employing a VAR(1)-GARCH(1,1) methodology and a set of US 20 single-sorted book-to-market and size portfolios from 1928-2001, we show that the decomposition of the single-factor beta delivers stable systematic risk measures and increases considerably the cross-sectional variation of the estimated betas across size and value portfolios. This feature may prove valuable in asset-pricing and calculations of the cost of equity capital.
Keywords: CAPM, cash-flow risk, discount-rate risk, VAR-GARCH, BEKK, value, size
JEL Classification: G11, G14
Suggested Citation: Suggested Citation