Cash Flow and Risk Premium Dynamics in an Equilibrium Asset Pricing Model with Recursive Preferences

2015 ◽  
Author(s):  
Taeyoung Doh ◽  
Shu Wu
Keyword(s):  
Asset Pricing ◽  
Cash Flow ◽  
Risk Premium ◽  
Pricing Model ◽  
Recursive Preferences ◽  
Asset Pricing Model ◽  
Equilibrium Asset Pricing

scholarly journals Measuring Risk Structure Using the Capital Asset Pricing Model

2015 ◽  
Vol 63 (1) ◽  
pp. 227-233 ◽  
Author(s):  
Zdeněk Konečný ◽  
Marek Zinecker
Keyword(s):  
Asset Pricing ◽  
Cash Flow ◽  
Operational Risk ◽  
Capital Asset Pricing Model ◽  
Capital Asset Pricing ◽  
Financial Risks ◽  
Pricing Model ◽  
Capital Asset ◽  
Data Set ◽  
Asset Pricing Model

This article is aimed at proposing of an inovative method for calculating the shares of operational and financial risks. This methodological tool will support managers while monitoring the risk structure. The method is based on the capital asset pricing model (CAPM) for calculation of equity cost, namely on determination of the beta coefficient, which is the only variable, that is dependent on entrepreneurial risk. There are combined both alternative approaches for calculation betas, which means, that there are accounting data used and there is distinguished unlevered beta and levered beta. The novelty of the proposed method is based on including of quantities for measuring operational and financial risks in beta calculation. The volatility of cash flow, as a quantity for measuring of operational risk, is included in the unlevered beta. Return on equity based on the cash flow and the indebtedness are variables used in calculation of the levered beta. This modification makes it possible to calculate the share of operational risk as the proportion of the unlevered/levered beta and the share of financial risk, which is the remainder of levered beta. The modified method is applied on companies from two sectors of the Czech economy. In the data set there are companies from one cyclical sector and from one neutral sector to find out potential differences in the risk structure. The findings show, that in both sectors the share of operational risk is over 50%, however, in the neutral sector is this more dominant.

scholarly journals Time-Varying Market Leverage and the Market Risk Premium in New Zealand

2021 ◽  
Author(s):  
◽  
Danyi Bao
Keyword(s):  
New Zealand ◽  
Asset Pricing ◽  
Risk Premium ◽  
Market Risk ◽  
Capital Asset Pricing ◽  
Time Varying ◽  
Pricing Model ◽  
Capital Asset ◽  
Market Risk Premium ◽  
Asset Pricing Model

<p>This paper applies the Ibbotson and Sinquefield (1976) method and the Lally (2002) method to New Zealand data over the period 1960-2005 in order to estimate the market risk premium (MRP) in two versions of the capital asset pricing model (CAPM). With respect to the standard CAPM, the resulting Ibbotson estimate of the MRP for New Zealand was 6.11%. The resulting Lally estimate of the MRP ranged from 5.52% (in 1970) to 18.40% (in 1990), with an average of 7.95%, and was 6.40% for 2005. With respect to the simplified Brennan-Lally CAPM, the resulting Ibbotson estimate of the MRP for New Zealand was 8.49%. The resulting Lally estimate of the MRP ranged from 7.91% (in 1970) to 20.79% (in 1990), with an average of 10.33%, and was 8.78% for 2005. The Lally and the Ibbotson estimates of the MRP are similar in general. However, when market leverage is unusually high or low, they diverge significantly. In future, practitioners may need to choose between the estimates from the two methods when market leverage goes beyond the normal level.</p>

scholarly journals Impact of Climate Change Hazard: Carbon Risk on Stock Returns and Asset Pricing

2021 ◽  
Author(s):  
Ume Salma Akbar ◽  
Niaz Ahmed Bhutto ◽  
Suresh Kumar Oad Rajput
Keyword(s):  
Carbon Dioxide ◽  
Asset Pricing ◽  
North America ◽  
Risk Premium ◽  
Carbon Dioxide Emissions ◽  
Equity Returns ◽  
Asia Pacific ◽  
Pricing Model ◽  
Asset Pricing Model ◽  
Fama And French

In this study, I extend the Fama and French five-factor asset pricing model with a sixth factor, namely, carbon risk, to investigate its impact on equity returns. To measure carbon risk, a new factor &lsquo;pollutant minus green,&rsquo; is developed using the difference between the weighted average returns of pollutant and green firms across 51 developed and emerging countries across four categories&mdash;North America, Europe, Emerging Markets, and the Asia Pacific. The results reveal that North America, Europe, and Asia Pacific markets have a carbon risk premium that gets eliminated in small-cap firms. The carbon risk factor is further tested in left-hand side (LHS) test asset portfolios and found to be more pronounced with size-effect anomaly; specifically, small stock firms report greater declining average returns because of more exposure than the mega-cap stocks to carbon dioxide emissions. Furthermore, size-effect anomaly prevails with profitability and investment factors across firms. Therefore, high profitability, as well as high investment small firms, show a greater decline than the big stock firms in average returns when their carbon dioxide emissions increase. The asset pricing model evaluation is carried out through the Gibbons, Ross, and Shanken test. The six-factor model directed at capturing carbon risk patterns in average equity returns performs better than the three-factor and five-factor models of Fama and French (1993 and 2015) in the majority of categories under 3x3 sorting and compete with both Fama and French model under 2x4x4 sorted LHS portfolios. The finding of this study offers various useful applications for investors, policymakers, brokers, corporations, governmental pollution abatement institutions, and other stakeholders who wish to obtain carbon risk premium.

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