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) and the duration model from Lettau and Wachter (2007) discuss cashflow risk whereas the external habit model from Campbell and Cochrane (1999) is about discount risk? The investment decision model from Berk Green and Naik (1999) apparently includes both? What about the simple CAPM and CCAPM?

Campbell and Vuolteenaho (2004) use an ICAPM set-up to decompose market beta in cashflow and discount component and show that value stocks have higher CF betas.

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    $\begingroup$ From [Santos, Veronesi][1], I pulled these definitions: 1) Cash-flow risk of an asset, is the covariance of the asset's cash-flow with the aggregate economy. 2) Discount risk, is the time variation of the market price of risk. The two combine to determine the time series properties of the market portfolio and the cross-sectional properties of stock returns. I'm not posting this as an answer since I cannot help you with any further inquiries you might have on the subject. [1]: nber.org/papers/w11816.pdf $\endgroup$
    – user28226
    Jul 13, 2020 at 12:22
  • $\begingroup$ @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? $\endgroup$
    – Alex
    Jul 14, 2020 at 10:18
  • $\begingroup$ of stock returns, yes $\endgroup$
    – user28226
    Jul 14, 2020 at 11:29
  • $\begingroup$ @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? $\endgroup$
    – Alex
    Jul 14, 2020 at 11:46
  • $\begingroup$ c-capm is a generalization of the capm that is consumption based. ICAPM is intertemporal; it forecasts changes to the distribution of future returns of income. $\endgroup$
    – user28226
    Jul 14, 2020 at 19:15


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