Temporary and permanent market risks: Some further evidence
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 to, 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. (c) 2007 Elsevier Ltd. All rights reserved.
capm cash-flow risk discount-rate risk var-garch bekk value/size premium