Intertemporal Market Risks and the Cross-Section of Greek Average Returns

This paper examines whether the overall market risk along with risks re‡ecting uncertainty related to the long run dynamics of market cash ‡ows (dividends) and discount rates (returns) price average returns on single-sorted portfolios of the Greek stock market. Following Campbell and Vuolteenaho (American Economic Review, 2004) we check whether these two types of risk provide an empirical improvement over the static CAPM and if cash-‡ow risk is more important than discount-rate risk, as a rational I-CAPM risk story would predict. Our results suggest that the two-beta intertemporal model performs at least as well as the Fama-French (Journal of Financial Economics, 1993) three factor model since it explains half of the cross-sectional variation in average returns and delivers an economically and statistically acceptable estimate of the coe¢ cient of relative risk aversion. More importantly, despite the relative importance of market discount-rate risk, it is market dividend-growth risk that turns out to be far more important in determining average returns on Greek portfolios.