In e empo al Ma ke Risks and he C oss-Sec ion o
G eek A e age Re u ns1
Michail Koubou os2
Uni e si y o Peloponnese & Uni e si y o Pi aeus
Eka e ini Panopoulou3
Na ional Uni e si y o I eland, Maynoo h & Uni e si y o Pi aeus
This d a : Feb ua y 20, 2006
1We a e in eb ed o Gikas Ha dou elis, Dimi ios Mallia opulos, Jack Meye and an anonymous
e e ee o hei sugges ions. We would also like o hank he semina pa icipan s a he Uni e -
si y o Peloponnese, he Uni e si y o Pi aeus, he Na ional Uni e si y o I eland and he 4 h HFAA
Con e ence (Pi aeus, 2005) o hei help ul commen s. We acknowledge nancial suppo om
he G eek Minis y o Na ional Educa ion and Religious A ai s and he Eu opean Union unde he
“PYTHAGORAS: Funding o easea ch g oups in he Uni e si y o Pi aeus” g an . The usual dis-
claime applies.
2Co esponding au ho : Uni e si y o Peloponnese, Depa men o Economics, Te ma
Ka aiskaki, 221 00 T ipolis, G eece. Phone: (+30) 2710 230129, ax: (+30) 2710 230139, e-mail:
[email p o ec ed].
3Depa men o Banking and Financial Managemen , Uni e si y o Pi aeus, G eece and Depa -
men o Economics, Na ional Uni e si y o I eland Maynoo h, email: [email p o ec ed].
Abs ac
This pape examines whe he he o e all ma ke isk along wi h isks eec ing unce ain y
ela ed o he long un dynamics o ma ke cash ows (di idends) and discoun a es ( e-
u ns) p ice a e age e u ns on single-so ed po olios o he G eek s ock ma ke . Ou e-
sul s sugges ha a wo-be a in e empo al p icing model explains hal o he c oss-sec ional
a ia ion in a e age e u ns and deli e s an economically and s a is ically accep able es i-
ma e o he coe cien o ela i e isk a e sion. Despi e he ela i e impo ance o ma ke
discoun - a e isk, i is ma ke di idend-g ow h isk ha u ns ou o be a mo e signican
in de e mining a e age e u ns on G eek po olios.
JEL: G11, G12, G14
Keywo ds: CAPM, be a, cash ow isk, discoun a e isk, isk a e sion.
1 In oduc ion
Nume ous s udies ha e shown ha he single be a CAPM, a leas in i s uncondi ional
o m, pe o ms poo ly since he c oss-sec ional a ia ion in uncondi ional ma ke be as
canno ma ch he obse ed sp ead in a e age excess e u ns.1Recen ly, Campbell and
Vuol eenaho (2004) and Campbell, Polk and Vuol eenaho (2005) show ha he ma ke be a
can be decomposed in o a ela i ely bad cash-ow be a, eec ing news abou he ma ke 's
u u e cash ows (di idend g ow h a es), and a ela i ely good discoun - a e be a, eec ing
news abou he ma ke 's u u e discoun a es ( e u ns). Acco ding o hei model he wo
pa s o o al ma ke isk ha e di e en implica ions in asse p icing. Specically, since ma -
ke cash-ow shocks and discoun - a e shocks ep esen pe manen and empo a y shocks
o o e all weal h espec i ely, a ional conse a i e in es o s a e pa icula ly a e se o he
o me and equi e a highe p emium. Mo e impo an ly, his cash-ow isk p emium should
be a mul iple o hei a i ude owa d isk. Empi ically, Campbell and Vuol eenaho (2004)
nd ha hei decomposi ion could sol e he small- alue puzzle ound in US da a.
In his pape we s udy he c oss-sec ional beha io o cash-ow and discoun - a e isks
along wi h hei abili y o p ice e u ns o a se o 25 single so ed po olios o he G eek
s ock ma ke (A hens S ock Exchange, A.S.E.) o he pe iod om 1991 o 2003. Using
he empi ical me hodology o Campbell (1991), Campbell and Mei (1993), Campbell and
Vuol eenaho (2004) and Campbell, Polk and Vuol eenaho (2005), we  s es ima e ma -
ke cash-ow and discoun - a e news and be as and hen check whe he he sensi i i ies o
po olio e u ns o hese o al ma ke isk componen s can se e as su cien isk measu es
which a e p iced in A.S.E. e u ns. Al hough some ecen s udies examine he p ope ies o
he wo componen s o agg ega e ma ke e u n in se e al eme ging ma ke s (e.g. Phylak is
and Ra azzolo, 2002), he e is no o he s udy, o he bes o ou knowledge, which exam-
ines he asse p icing implica ions o his decomposi ion using A.S.E. da a. In his espec ,
ou s udy comes as a di ec complemen o hese empi ical ndings since i p o ides some
1Fo a ecen e iew on he CAPM li e a u e see, among o he s, Fama and F ench (2004).
1
new insigh s, in e ms o a small and eme ging ma ke , on he independen ole o economic
undamen als in p icing he c oss-sec ion o a e age s ock e u ns.
Ou esul s indica e ha he wo-be a decomposi ion o he o al ma ke isk inc eases
he abili y o he s a ic, single ac o , CAPM o p ice G eek s ock e u ns. Mo e in de ail,
all po olios exhibi conside able sp ead in isk exposu e o ma ke cash-ow and discoun -
a e isk and bo h ypes o isk a e c oss-sec ionally p iced. Fu he mo e, by employing a
disc e e- ime in e empo al asse p icing model, we nd ha cash-ow isk is mo e impo -
an o he c oss-sec ion o a e age A.S.E. e u ns since i embodies a be a- isk p emium
ha is much highe han he one embodied in discoun - a e isk. Specically, he wo-be a
model cap u es almos hal o he a ia ion in po olio mean e u ns, pe o ms sligh ly
be e han he popula Fama-F ench (1993) model and deli e s meaning ul and highly sig-
nican alues o isk a e sion. O e all, and in line wi h he US ndings o Campbell and
Vuol eenaho (2004) and Campbell, Polk and Vuol eenaho (2005), he wo-be a model ex-
plains he sp ead in e u ns ound ac oss alue and size po olios and hus p o ides aluable
insigh s o he small-o e -la ge and alue-o e -g ow h puzzles.
The emainde o he pape is o ganized as ollows: Sec ion 2 p o ides he heo e ical
decomposi ion o o al ma ke isk in o wo pa s; e u n isks associa ed wi h ma ke 's cash-
ow and discoun - a e dynamics. I also de elops he in e empo al asse p icing amewo k
ha will be used o he asse p icing es ima ion. The da ase and he econome ic me hod-
ology employed o ex ac he news componen s o ma ke unexpec ed e u ns a e gi en
in Sec ion 3. Sec ion 4 p esen s he empi ical esul s and, nally, Sec ion 5 o e s some
concluding ema ks.
2 The Model
Agen s a e assumed o choose hei op imal consump ion and po olio posi ions using
he ecu si e u ili y amewo k p o ided by Eps ein and Zin (1989, 1991) and Weil (1989).
2
The li e ime u ili y unc ion o he in es o is gi en by he ecu si e u ili y unc ion U ;
dened o e cu en eal consump ion, C , and expec ed u ili y o u u e eal consump ion,
E [U C1]:
U .C ;E [U C1]/D.1/C
1

CE [U1
C1]1

1
(1)
whe e 0 <  < 1 is he subjec i e discoun ac o ,  > 0 is he cons an , unde his
specica ion, coe cien o ela i e isk a e sion (CRRA), is a pa ame e dened as D
.1 /=.11/; and  > 0 is he elas ici y o in e empo al subs i u ion (EIS) be ween
cu en and expec ed u u e consump ion. Equa ion (1) has he ad an age o b eaking he
igh link be ween CRRA and EIS gi en by powe u ili y (D1
), hus, disconnec ing
in es o s' isk a i ude ac oss s a es o na u e (desc ibed by ) and ac oss ime (desc ibed
by ).
The consume is assumed o nance all he consump ion plan en i ely om he o al eal
weal h W ;gi en he ollowing dynamic budge cons ain :
W C1D.1CRW; C1/.W C /(2)
whe e RW; C1is he ne eal e u n on o al weal h. Eps ein and Zin (1989) sol e o he
op imal po olio and consump ion policies and show ha he ollowing se o condi ional
momen es ic ions hold o each asse iand he o al-weal h po olio W:
E [G
R1
W; C1Ri; C1]D1I o iD1; :::; N(3)
whe e G C1
de
DC C1
C is he op imally chosen g oss g ow h a e o eal consump ion be ween
and C1. The abo e se o non-linea momen es ic ions can be linea ized using he
assump ion o join condi ional log-no mali y o asse e u ns and consump ion in he spi i
o Hansen and Single on (1983). Using hese s ong assump ions along wi h he dynamic
budge cons ain in (2), Campbell (1993, 1996) de i es he ollowing c oss-sec ional linea
3

es ic ions on asse s' isk p emia ha places no ole in consump ion as a p iced isk ac o :
E [Re
i; C1]Dco . i; C1; W; C1E [ W; C1]/C.1/co . i; C1;NDR
W; C1/; (4)
whe e E [Re
i; C1]de
DE [Ri; C1]R ; C1, and R ; C1is he simple e u n on he isk- ee
asse . The abo e equa ion can be iewed as a disc e e- ime e sion o Me on's (1973) I-
CAPM whe e changes in he u u e in es men oppo uni y se s (cap u ed by news abou
u u e o al weal h po olio e u ns, NDR
W; C1) a e also p iced in addi ion o he con empo a-
neous ma ke isk ( he  s co a iance e m).
Campbell and Vuol eenaho (2004) go one s ep u he and, using he unexpec ed e-
u n decomposi ion de eloped by Campbell and Shille (1988a) and u he ex ended by
Campbell (1991), b eak he  s ac o (ma ke e u n inno a ion) in o news abou u u e
di idend (cash-ows) g ow h a es and news abou u u e o al e u ns (discoun - a es). Fo -
mally, Campbell (1991) has de i ed he ollowing app oxima e log linea decomposi ion o
e u ns in o ime C1 e ision in expec a ions (news) abou he p esen alue o all u u e
o al-weal h di idend g ow h a es (cash-ow news, NC F
W) and he ime C1 e ision in
expec a ions abou he p esen alue o all u u e o al-weal h e u ns (discoun - a e news,
NDR
W):
W; C1E C1[ W; C1]DNC F
W; C1NDR
W; C1;(5)
whe e NC F
W; C1DE C1[P1
jD0j1dW; C1Cj]E [P1
jD0j1dW; C1Cj] and NDR
m; C1D
E C1[P1
jD1j W; C1Cj]E [P1
jD1j W; C1Cj], PW; C1is he eal agg ega e (ma ke )
s ock p ice measu ed a he end o pe iod C1 (ex-di idend), dW; C1Dlog.DW; C1/is he
log o he eal di idend paymen o o al weal h du ing his pe iod, W; C1Dlog.PW; C1CDW; C1
PW; /
is he one-pe iod holding log eal g oss e u n on he o al weal h po olio, WD1=[1 C
exp.W/] and WDE[log.dW; pW; /] is he uncondi ional mean o he log agg ega e
di idend-p ice a io. The  s e m in (5) is he ime C1 e ision in di idend g ow h
expec a ions and ep esen s a pe manen posi i e e ec on o al weal h since i is ne e e-
e sed subsequen ly, whe eas he second one is he ime C1 e ision in expec a ions abou
4
u u e e u ns on o al weal h and hus can be iewed as a empo a y shock o he o al weal h
since he unexpec ed capi al gain oday  W; C1E C1[ W; C1]>0is a a cos o lowe
u u e in es men oppo uni ies, i.e. E C1[P1
jD1j W; C1Cj]E [P1
jD1j W; C1Cj]<0.
Using he abo e decomposi ion o he o al weal h unexpec ed e u n and he wo ac o
asse p icing es ic ion in (4) we ge he ollowing asse p icing model ha assigns di e en
oles o agg ega e di idend g ow h a es' news and e u ns' news in de e mining asse isk
p emia:
E [Re
i; C1]Dco . i; C1;NC F
W; C1/Cco . i; C1;NDR
W; C1/; (6)
The co a iance isk p emium ep esen a ion in (6) can ha e an equi alen be a-like p emium
ep esen a ion (Coch ane, 2001). Mul iplying and di iding by he a iance o o al-weal h
e u n inno a ions, a . W; C1E  W; C1/, we ge :
E [Re
i; C1]DC F; i;C F; CDR; i;DR; (7)
wi h C F; D a . W; C1E [ W; C1]/,DR; D a . W; C1E [ W; C1]/and:
i;W; Dco . i; C1;NC F
W; C1/
a . W; C1E [ W; C1]/Cco . i; C1;NDR
W; C1/
a . W; C1E [ W; C1]/
Di;C F; Ci;DR; (8)
Equa ion (8) s a es ha he equi ed isk p emium on asse iis join ly de e mined by
he be as o i s e u n wi h he co esponding decomposed componen s o he o al ma ke
isk; cash-ow and discoun - a e be a ha add o he ull o al weal h, CAPM, be a. A
conse a i e isk-a e se in es o ( > 1) demands a highe isk p ice o isks associa ed
wi h o al-weal h cash-ow (di idend g ow h) unce ain y (i;C F ) a he han o isks linked
o shocks o o al weal h po olio e u ns (i;DR), since any posi i e (nega i e) shock o
weal h discoun a es is a a bene (cos ) o wo se u u e in es men oppo uni ies, whe eas
5
he in es o is ne e compensa ed la e o e e y posi i e (nega i e) shock o di idends.
Hence, he be a p ice o ma ke cash-ow isk C F is a mul iple o he be a isk p ices o
ma ke discoun - a e isk DR. Thus, o a conse a i e in es o i mus be C F > DR >0.
In o de o ge compa able esul s o he empi ical li e a u e o he uncondi ional CAPM
and, mo e impo an ly, o he empi ical ndings o he wo-be a model o Campbell and
Vuol eenaho (2004) ha places a ela i ely mo e impo an ole in cash-ow isk, we condi-
ion down equa ion (7) and p oceed wi h i s uncondi ional e sion.
3 Da a and Empi ical Me hodology
Ou s udy is based on mon hly G eek asse and mac oeconomic da a o he pe iod om
June 1991 o May 2003 (133 mon hly obse a ions) ob ained om he Da as eam In e -
na ional da abase. Specically, ou da a consis o (a) di e en se s o common s ock es
po olios so ed on a ious  m specic cha ac e is ics such as book- o-ma ke , di idend
yield, ma ke capi aliza ion, p ice-ea nings a io and 3-mon h momen um, and (b) a se o
economy-wide a iables ha se e as ins umen s. The so ing cha ac e is ics whe e cho-
sen in o de o gene a e clea sp eads in a e age e u ns ha will challenge he empi ical
alidi y o he wo-be a asse p icing model. On he o he hand, and ollowing he common
p ac ice, he s a e a iables ha e been selec ed unde he assump ion ha hey exhibi some
o ecas ing abili y o e u u e po olio e u ns. Las ly, we assume ha he o al ma ke
alue-weigh ed po olio is a good p oxy o he o al-weal h po olio in he G eek econ-
omy, so ha RWDRM.
We employ a a ian o he Fama and F ench (1993) me hodology o cons uc alue-
weigh ed e u ns on 25  m-cha ac e is ic po olios so ed on he abo e cha ac e is ics,
and e u ns on he wo Fama and F ench (1993) agg ega e size and book- o-ma ke ac-
o mimicking po olios, Small-Minus-Big (SM B) and High-Minus-Low (H M L), espec-
i ely. The la e ac o -mimicking po olios will be used as benchma ks in ou asse p icing
6
es s.
The po olio cons uc ion p ocedu e has as ollows. In June, e e y yea , we b eak he
ull menu o A.S.E. common s ocks a ailable in o 5 g oups based (once a a ime) on las -
mon h book- o-ma ke , di idend yield, ma ke capi aliza ion, p ice-ea nings a io and 3-
mon h momen um, so ha each g oup con ains an equal numbe o s ocks. We  s collec
mon hly closing p ices o each s ock and since he heo e ical decomposi ion in (5) equi es
con inuous da a on di idends we di ide he annual di idend paymen by 12 and add i o
he mon hly closing p ice.2Then, we compu e he alue-weigh ed mon hly holding pe iod
simple po olio e u n by weigh ing each s ock by i s ela i e con ibu ion o he po olio's
o al capi aliza ion. The p ocedu e is epea ed e e y yea and we end up wi h ime-se ies
da a o simple e u ns on each cha ac e is ics-so ed po olio. Finally, and al hough he
model in (7) is w i en in eal log e u ns, we assume ha o he mon hly es in e al we
employ, ina ion a es a e almos ully o ecas able, and hus we p oxy eal log e u ns wi h
nominal log e u ns.
Fo he cons uc ion o he e u ns on he agg ega e alue ac o -mimicking ze o-cos
po olio (High Minus Low, H M L) we used he 30-40-30 ule employed by Fama and
F ench (1993). Howe e , o he agg ega e size ac o -mimicking ze o-cos po olio (Small
Minus Big, SM B) we adjus he o ma ion p ocedu e o accoun o he cha ac e is ics o
he G eek da a. We use he 70 h quan ile o he o al ma ke alue ins ead o he median
ha was used by Fama and F ench. Gi en, ha ew la ge s ocks domina e he G eek s ock
ma ke , a 50% so ing would gene a e a small-cap po olio ha would ep esen only a
e y small p opo ion o he o al ma ke alue. In his espec , using a la ge b eakpoin
we can c ea e a dis ibu ion o agg ega e ma ke alue ac oss po olios ha is ela i ely
simila o he dis ibu ion in Fama and F ench(1993), while he small capi aliza ion po olio
ep esen s on a e age he 8% o he o al A.S.E. ma ke capi aliza ion.3A he end o June
2Al hough his echnique o sp eading he di idends o e he yea on he closing p ice assumes s ong
o m e ciency o he ma ke , i is common p ac ice when cons uc ing o al ma ke indexes ha assume
ein es men o di idends o e he nex pe iod. We hank an anonymous e e ee o poin ing his ou .
3Fo a simila cons uc ion p ocedu e using da a om he UK ma ke , see Dimson, Nagel and Quigley
(2003).
7
he uncondi ional e sion o he asse p icing model in (7). Howe e , and gi en he low
quali y o isk- ee a e da a o ou sample pe iod we p oceed wi h he ze o-be a e sions
o ou asse p icing es s. So, he cons an e m 0in he linea specica ions below is no
longe he a e age p icing e o as i would be in (4), (6) and (7), and hus, i can (o be e
should, unde he hypo hesis o he exis ence o a ze o-be a asse in A.S.E.) be di e en om
ze o. The model is es ed agains he s a ic CAPM and he Fama-F ench (1993) h ee- ac o .
Mo e specically, we conside he ollowing c oss-sec ional specica ion o he wo be a
(cash-ow and discoun - a e) model:
ET[Ri]D0CC Fb
i;C F CDRb
i;DR;(13)
and we es his wo-be a specica ion agains he popula s a ic single-be a CAPM ha
imposes he same isk p ices in cash-ow and discoun - a e isk and hus p ices agg ega e
ma ke isk, i;M:
ET[Ri]D0CMb
i;M;(14)
and he popula h ee- ac o Fama-F ench (1993) model ha adds agg ega e alue (H M L)
and size (SM B) ac o mimicking po olios as compe ing ac o s o he agg ega e ma ke
e u n:
ET[Ri]D0CMb
i;MCH M Lb
i;H M L CSM Bb
i;SM B;(15)
In all equa ions ET[Ri] deno es a e age (sample mean) po olio e u ns and b
i;kdeno e he
es ima ed be as on he k h ac o as dened in (11) and (12). We es ima e he uncondi ional
un es ic ed p ices o be a isks (b
s) o he a o emen ioned models as well as he ollowing
es ic ed e sion o he wo-be a model in (16):
ET[Ri]D0C b
i;C F Cb
i;C F (16)
This las e sion enables o es ima e he coe cien o ela i e isk a e sion and he isk
p emium on he discoun - a e ac o . The model p edic s ha he p emium associa ed
14

wi h ma ke cash-ow isk mus be a mul iple o he p emium associa ed wi h discoun -
a e isk. Fo a conse a i e isk-a e se in es o ( > 1 in (1)); C F mus be g ea e han
DR;i.e. C F > DR.
Table 6 p esen s he empi ical ndings o he c oss-sec ional asse p icing es s. The
able epo s he mean and s anda d e o o each es ima e, as well as he a e age adj.-R2o
he eg ession. Figu e 1 gi es a isual illus a ion o he empi ical abili y o he al e na i e
models by plo ing he ealized and  ed a e age e u ns. The be e he model pe o ms
he closes o he 45-deg ee line he poin s all. A pe ec ma ch (R2D100%) is achie ed
when all poin s all on he 45-deg ee line.
Con a y o many US s udies (e.g. Fama and F ench, 1992, Campbell, Polk and Vuol eenaho,
2004), he adi ional s a ic CAPM pe o ms qui e well and explains almos hal o he c oss-
sec ional a ia ion in a e age e u ns. Howe e , i ails o p oduce a signican es ima e o
he ze o-be a coe cien (b
0D 0:005 wi h s:e:D0:0048).
Nex , we check whe he he wo-be a decomposi ion in (13) wi h un es ic ed p ices o
be a isk can imp o e he empi ical alidi y o he s anda d s a ic CAPM and whe he he e
a e di e en oles in ma ke cash-ow and discoun - a e isks. The model pe o ms qui e
well and gene a es s a is ically signican p emia and explains 46.6% o he obse ed c oss-
sec ional a ia ion in A.S.E. po olio e u ns. Mo e impo an ly, i gene a es signican
isk p emia o bo h ypes o isk wi h he p emium associa ed wi h ma ke cash-ow isk
being much highe han ha associa ed wi h ma ke 's discoun - a e isk (b
C F D0:0274 and
b
DR D0:0096). These esul s a e in line wi h Campbell and Vuol eenaho (2004) and in
a o o he o al ma ke isk decomposi ion in (7) and (8). Fu he , when we es ima e he
es ic ed e sion o he model in (16) he ac o o p opo ionali y, which is es ic ed o
be equal o he coe cien o ela i e isk a e sion,  ; is bo h economically and s a is ically
signican . Specically, he es ima e o bD2:8572 (s:e:D0:1612) is in he ange hypo he-
sized by Meh a and P esco (1985) ha could sol e he well known equi y p emium puzzle.
We also es ed o uncons ained isk p emia using cash-ow and discoun - a e isk once a a
15
ime (see, columns labelled CF and DR). Again, ou esul s indica e ha , al hough bo h ypes
o in e empo al ma ke isks a e needed o desc ibe he c oss-sec ion o e u ns, cash-ow
isk is much mo e impo an wi h a isk p emium h ee imes highe han he one o discoun -
a e isk. The espec i e es ima es a e b
C F D0:0320 and b
DR D0:0107. The wo Fama-
F ench (1993) ac o s, H M L and SM B;pe o m ela i ely well by explaining he same
p opo ion o c oss-sec ional ola ili y as he wo-be a model, bu ail o deli e posi i e and
s a is ically signican p emium o he o e all ma ke isk (b
MD 0:0015;s:e:D0:0064).
Wha is mo e, none o he agg ega e alue and size p emia (H M L and SM B) a e signi-
can a he 1% le el. Las ly, and o expe imen al pu poses we use all ac o s in an ex ended
model. Ou esul s sugges ha he ela i e impo ance o cash-ow isk is clea bu we a e
inconclusi e on he one o he discoun - a e isk, especially when he signican size isk is
included.
5 Conclusions
This pape builds on he decomposi ion o he o e all ma ke , o CAPM, isk in o pa s
eec ing ime a ia ion ela ed o he dynamics o agg ega e ma ke cash ows and discoun
a es using da a om he small and eme ging G eek s ock ma ke (A hens S ock Exchange).
Employing he me hodology o Campbell (1991), Campbell and Mei (1993) and Campbell
and Vuol eenaho (2004) we decompose ma ke be as in o wo sub-be as, associa ed wi h
e isions in expec a ions abou u u e ma ke di idend g ow h a es and u u e e u ns. Using
a VAR(1) app oach and a disc e e ime e sion o Me on's I-CAPM, we es whe he hese
componen s o o e all ma ke isk a e a ionally p iced and hus explain he alue, size
and momen um p emia obse ed in ou mon hly 1991-2003 sample. The heo e ical model
p edic s ha al hough bo h ypes o isk a e impo an o he c oss-sec ion, ma ke cash-
ow isk (cap u ed by he sensi i i y o e u ns o ma ke cash-ow news) should ea n a
highe be a- isk p emium han ma ke discoun - a e isk.
16
The wo-be a model pe o ms qui e well in p icing a e age e u ns on single-so ed po -
olios acco ding o book- o-ma ke , di idend-yield, ma ke capi aliza ion, p ice-ea nings
and 3-mon h momen um. Consis en wi h heo y, he model deli e s an economically and
s a is ically signican es ima e o he coe cien o ela i e isk a e sion (close o 3), ex-
plains almos hal o he c oss-sec ional a ia ion in A.S.E. po olio e u ns and gene ally
pe o ms a leas as good as he popula h ee- ac o Fama-F ench (1993) model. We nd
ha he exposu e o G eek s ock po olios o isks associa ed wi h pe manen shocks o
agg ega e ma ke alue (cap u ed by ma ke cash-ow isk) is compensa ed wi h highe
uncondi ional isk p ices han he exposu e o isks associa ed wi h u u e ma ke e u ns.
Ou esul s a e in a o o a a ional isk I-CAPM- ype s o y whe e economic agen s ha e
a long- e m op imizing beha io , do no beha e myopically and alue s ocks acco ding o
hei long- un iskiness.
17
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21
Table 1.
VAR es ima es o ma ke po olio and diagnos ic es s
Panel A: VAR Es ima es
M; C11log .L I C1/p C1e C1V S C1
cons an 0:033
.0:021/
0:023
.0:009/0:055
.0:029/
0:032
.0:041/
M; 0:147
.0:086/
0:056
.0:039/
0:043
.0:119/
0:185
.0:165/
1log .L I /0:194
.0:160/0:528
.0:073/
0:077
.0:223/
0:405
.0:308/
p e 0:007
.0:001/
0:011
.0:007/
0:969
.0:021/0:044
.0:028/
V S 0:036
.0:006/
0:003
.0:006/
0:034
.0:018/
0:967
.0:025/
R29:5% 32:9% 94:7% 91:9%
F-s a . 3:530 16:499 598:4 384:70
Panel B: Uni Roo Tes s
M1log .L I/pe V S
ADF 10:199 6:391 1:722 1:746
ADF-GLS 10:200 6:088 1:7401:759
PP 10:259 6:388 1:944 2:046
KPSS 0:229 0:095 0:180 0:137
Panel C: LM Tes o He e oscedas ici y (ARCH Tes : lag D4/
Ou MOu1log.L I /OupeOuV S
F-s a . 0:327 1:081 2:134 0:709
p- alue [0:859] [0:369] [0:080] [0:593]
No e: Panel A. p esen s es ima es o he VAR(1) sys em in (9). M;is he alue-weigh ed
ma ke e u n, 1log .L I/is he change in he loga i hm o he OECD leading indica o ,
peis he ma ke log p ice-ea nings a io and V S is he alue-sp ead dened as he di -
e ence be ween he log(B/M) o he small high-B/M po olio and he log(B/M) o he
small low-BE/ME po olio. S anda d e o s o he es ima es a e in pa en heses. Panel B.
p esen s he uni - oo es s o he s a e a iables used in he VAR(1). ADF, ADF-GLS, PP
and KPSS s and o he alues o he Dickey-Fulle , Dickey-Fulle wi h GLS de ending,
Phillips-Pe on and Kwia kowski-Phillips-Schmid -Shin es s, espec i ely. *, ** and ***
deno e signicance a 10%, 5% and 1%, espec i ely. Panel C. epo s he alues o ARCH
he e oscedas ici y es s on he es ima ed VAR(1) esiduals. The sample pe iod spans om
June 1991 o May 2003.
22
Table 2.
Ma ke po olio cash-ow and discoun - a e news
Co a iance ma ix o news News co /s d.de .
NC F
MNDR
MNC F
MNDR
M
NC F
M0:0081 0:0034 NC
M0:091 0:563
NDR
M0:0034 0:0046 ND
M0:563 0:215
Co ela ions o inno a ions wi h news Func ions
Inno a ions/News NC F
mNDR
mNC F
MNDR
M
M0:679 0:225 Mshock 1:052 0:052
1log .L I/0:277 0:295 1log .L I /shock 0:683 0:683
pe0:224 0:398 peshock 0:273 0:273
V S 0:603 0:855 V S shock 0:399 0:399
No e: The able epo s he es ima ed co a iance ma ix (uppe -le ) and he co ela ion
ma ix wi h s anda d de ia ions (uppe - igh ) o he es ima ed ma ke po olio cash-ow
and discoun a e news using equa ions (9) o (10), he co ela ions o inno a ions o s a e
a iables wi h ma ke news (lowe -le ) and he mapping unc ions dened in (10). The
sample pe iod spans om June 1991 o May 2003.
23