Cash-Flow or Discount-Rate Risk?

Thursday, November 14, 2013 ( 2:00 pm to 3:30 pm )

Location: Babbio Center 430

Evidence from the Cross Section of Present Values


Realized returns comprise (ex-ante) expected returns plus (ex-post) innovations, and consequently both expected returns and returns innovations could be broken down into components reflecting fluctuations in cash flow (CF) and discount rate (DR). I use a present-value model to identify the CF and DR risk factors, which are latent from the time series and cross sections of price–dividend ratios. This setup accommodates models where CF risk dominates, like Bansal and Yaron (2004), and models where DR risk dominates, like Campbell and Cochrane (1999). I estimate the model on portfolios, which capture several of the most common cross-sectional anomalies, and decompose the expected and unexpected returns into CF and DR components along both time-series and cross-sectional dimensions. I find that (1) the DR risk is more likely to explain the variations of expected returns, (2) the CF risk drives the variations of unexpected returns, and (3) together they account for over 80% of the cross-sectional variance of the average stock returns.



Bingxu Chen is a doctoral candidate in Finance at Columbia Business School. He expects to receive his degree in May 2014. His research focus on empirical asset pricing and asset management, especially application of Bayesian econometric on various finance problems. His work integrates finance theories with practice. As a young and productive scholar, he has a number of working papers and one forthcoming publication in a top practitioner finance journal. For his research, he has received research grants from NETSPAR (Network for Studies on Pension, Aging and Retirement). Chen has been invited to present at many conferences, including the annual meeting of FMA 2013. 


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