Long-Run Cash-Flow and Discount-Rate Risks in the Cross-Section of US Returns

This paper decomposes the overall market (CAPM) risk into parts reecting uncertainty related to the long-run dynamics of portfolio-speci\u85c and market cash ows and discount rates. We decompose market betas into four sub-betas (as-sociated with assetsand markets cash ows and discount rates) and we employ a discrete time version of the I-CAPM to derive a four-beta model. The model performs well in pricing average returns on single- and double-sorted portfolios ac-cording to size, book-to-market, dividend-price ratios and past risk, by producing high estimates for the explained cross-sectional variation in average returns and economically and statistically acceptable estimates for the coe ¢ cient of relative risk aversion