Macroeconomic risk and the cross-section of stock returns |
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| Authors: | Jangkoo Kang Tong Suk Kim Changjun Lee Byoung-Kyu Min |
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| Institution: | aGraduate School of Finance, Korea Advanced Institute of Science and Technology (KAIST), Seoul, Republic of Korea;bBusiness School, Kwangwoon University, Seoul, Republic of Korea;cInstitute of Financial Analysis, University of Neuchatel, Neuchatel, Switzerland |
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| Abstract: | We develop a conditional version of the consumption capital asset pricing model (CCAPM) using the conditioning variable from the cointegrating relation among macroeconomic variables (dividend yield, term spread, default spread, and short-term interest rate). Our conditioning variable has a strong power to predict market excess returns in the presence of competing predictive variables. In addition, our conditional CCAPM performs approximately as well as Fama and French’s (1993) three-factor model in explaining the cross-section of the Fama and French 25 size and book-to-market sorted portfolios. Our specification shows that value stocks are riskier than growth stocks in bad times, supporting the risk-based story. |
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| Keywords: | JEL classification: G12 |
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