Cash flow and discount rate risk decomposition and ICAPM for the US and brazilian stock markets
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Data
2013-01-31
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Mergulhão, João de Mendonça
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This work applies the intertemporal asset pricing model developed by Campbell (1993) and Campbell and Vuolteenaho (2004) to the Brazilian 2x3 Fama-French stock portfolios from January 2003 to April 2012 and to the US 5x5 Fama-French portfolios in dfferent time periods. The variables suggested by Campbell and Vuolteenaho (2004) to forecast US market excess returns from 1929 to 2001 were also good excess return predictors for the Brazilian market on the recent period, except the term structure yield spread. However, we found that an increase in the small stock value spread predicts a higher market excess return, which is not consistent with the intertemporal model explanation for the value premium. Moreover, using the residuals of the forecasting VAR to define the test portfolios’ cash flow and discount rate shock risk sensitivity, we found that the resulting intertemporal model explains little of the variance in the cross section of returns. For the US market, we conclude that the proposed variables’ ability to forecast market excess returns is not constant in time. Campbell and Vuolteenaho’s (2004) success in explaining the value premium for the US market in the 1963 to 2001 sub-sample is a result of the VAR specification in the full sample, since we show that none of the variables are statistically significant return predictors in this sub-sample.