<p>I'm studying financial economics/asset pricing and I often hear the terms cashflow risk and discount risk but I'm not sure what they mean? The Campbell/Shiller (1988) decomposition includes cashflows (future dividends) and discount rates (expected returns) and hence identifies both risks?</p>
<p>Apparently, the long run risk model from <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1540-6261.2004.00670.x" rel="nofollow noreferrer">Bansal and Yaron (2004)</a> and the duration model from <a href="https://onlinelibrary.wiley.com/doi/full/10.1111/j.1540-6261.2007.01201.x" rel="nofollow noreferrer">Lettau and Wachter (2007)</a> discuss cashflow risk whereas the external habit model from <a href="https://www.jstor.org/stable/10.1086/250059?seq=1#metadata_info_tab_contents" rel="nofollow noreferrer">Campbell and Cochrane (1999)</a> is about discount risk? The investment decision model from <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/0022-1082.00161" rel="nofollow noreferrer">Berk Green and Naik (1999)</a> apparently includes both? What about the simple CAPM and CCAPM?</p>
<p><a href="https://www.jstor.org/stable/3592822?seq=1#metadata_info_tab_contents" rel="nofollow noreferrer">Campbell and Vuolteenaho (2004)</a> use an ICAPM set-up to decompose market beta in cashflow and discount component and show that value stocks have higher CF betas.</p>

CC BY-SA 4.0
2020-07-14T10:18:25.430Z
@the_rainbox thanks a lot for the link. I'll read the paper! If the discount rate only includes the price of market risk, then models with discount risk couldn't explain cross-sectional anomalies, right?
Alex
CC BY-SA 4.0
2020-07-14T11:46:48.487Z
@the_rainbox I suppose the CAPM is a cashflow risk model because it's a one period model and there's no time variation in the market price of risk? What about the C-CAPM and the ICAPM?
Alex
CC BY-SA 4.0
2020-07-14T19:16:51.917Z
@the_rainbox I understand the model. I wonder whether they study cashflow risk or discount risk?
Alex
<finance><financial-economics><asset-pricing><risk>
Cashflow Risk vs Discount Risk
Alex
# Cashflow Risk vs Discount Risk

(Asked by: username_0 on 2020-07-13)

I'm studying financial economics/asset pricing and I often hear the terms cashflow risk and discount risk but I'm not sure what they mean? The Campbell/Shiller (1988) decomposition includes cashflows (future dividends) and discount rates (expected returns) and hence identifies both risks?

Apparently, the long run risk model from [Bansal and Yaron (2004)](https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1540-6261.2004.00670.x) and the duration model from [Lettau and Wachter (2007)](https://onlinelibrary.wiley.com/doi/full/10.1111/j.1540-6261.2007.01201.x) discuss cashflow risk whereas the external habit model from [Campbell and Cochrane (1999)](https://www.jstor.org/stable/10.1086/250059?seq=1#metadata_info_tab_contents) is about discount risk? The investment decision model from [Berk Green and Naik (1999)](https://onlinelibrary.wiley.com/doi/abs/10.1111/0022-1082.00161) apparently includes both? What about the simple CAPM and CCAPM?

[Campbell and Vuolteenaho (2004)](https://www.jstor.org/stable/3592822?seq=1#metadata_info_tab_contents) use an ICAPM set-up to decompose market beta in cashflow and discount component and show that value stocks have higher CF betas.

**Tags:** finance, financial-economics, asset-pricing, risk

> **Comments:**
> **username_0**: @the_rainbox thanks a lot for the link. I'll read the paper! If the discount rate only includes the price of market risk, then models with discount risk couldn't explain cross-sectional anomalies, right?  
> **username_0**: @the_rainbox I suppose the CAPM is a cashflow risk model because it's a one period model and there's no time variation in the market price of risk? What about the C-CAPM and the ICAPM?  
> **username_0**: @the_rainbox I understand the model. I wonder whether they study cashflow risk or discount risk?  

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## 0 answers

