Why Is Long-Horizon Equity Less Risky?
A Duration-Based Explanation of the Value Premium
MARTIN LETTAU and JESSICA A. WACHTER∗

文件大小：286KB 文件格式：pdf

页数：38页

来源：Journal of Finance-February 2007 - Vol. 62 Issue 1 Page 55~93

ABSTRACT
We propose a dynamic risk-based model that captures the value premium. Firms are
modeled as long-lived assets distinguished by the timing of cash flows. The stochastic
discount factor is specified so that shocks to aggregate dividends are priced, but shocks
to the discount rate are not. The model implies that growth firms covary more with the
discount rate than do value firms, which covary more with cash flows. When calibrated
to explain aggregate stock market behavior, the model accounts for the observed value
premium, the high Sharpe ratios on value firms, and the poor performance of the
CAPM.

THIS PAPER PROPOSES A DYNAMIC RISK-BASED MODEL that captures both the high expected
returns on value stocks relative to growth stocks, and the failure of the
capital asset pricing model to explain these expected returns. The value premium,
first noted by Graham and Dodd (1934), is the finding that assets with a
high ratio of price to fundamentals (growth stocks) have low expected returns
relative to assets with a low ratio of price to fundamentals (value stocks). This
finding by itself is not necessarily surprising, as it is possible that the premium
on value stocks represents compensation for bearing systematic risk. However,
Fama and French (1992) and others show that the capital asset pricing model
(CAPM) of Sharpe (1964) and Lintner (1965) cannot account for the value premium:
While the CAPM predicts that expected returns should rise with the
beta on the market portfolio, value stocks have higher expected returns yet do
not have higher betas than growth stocks.

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