ABSTRACT
This paper decomposes the overall market, or CAPM, risk into parts reflecting long-run market uncertainty related to the dynamics of the present value of revisions in expectations about future asset-specific and market cash-flows and discount-rates respectively. We decompose market betas into four subbetas (associated with assets' and market's cash-flows and discount-rates) and we employ a discrete time version of the Intertemporal-CAPM (I-CAPM) to derive a four-beta asset pricing model. The model performs well in pricing average excess returns on single-sorted US common stock portfolios according to size, book-to-market and dividend-price ratios, and it produces insignificant pricing errors, high estimates for the explained cross-sectional variation in average returns and economically and statistically acceptable estimates for the coefficient of relative risk aversion.
