Dynamic Equity Slope

Matthijs Breugem, Stefano Colonnello, Roberto Marfe () and Francesca Zucchi

No 626, Carlo Alberto Notebooks from Collegio Carlo Alberto

Abstract: The term structure of equity and its cyclicality are key to understand the risks driving equilibrium asset prices. We propose a general equilibrium model that jointly explains four important features of the term structure of equity: (i) a negative unconditional term premium, (ii) countercyclical term premia, (iii) procyclical equity yields, and (iv) premia to value and growth claims respectively increasing and decreasing with the horizon. The economic mechanism hinges on the interaction between heteroskedastic long-run growth—which helps price long-term cash flows and leads to countercyclical risk premia—and homoskedastic short-term shocks in the presence of limited market participation — which produce sizeable risk premia to short-term cash flows. The slope dynamics hold irrespective of the sign of its unconditional average. We provide empirical support to our model assumptions and predictions.

Keywords: Term Structure of Equity; Dynamics; General Equilibrium; Expected Growth Volatility. (search for similar items in EconPapers)
JEL-codes: D51 D53 E30 G10 G12 (search for similar items in EconPapers)
Pages: pages 61
Date: 2020
New Economics Papers: this item is included in nep-mac and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.carloalberto.org/wp-content/uploads/2020/12/no.626.pdf (application/pdf)

Related works:
Working Paper: Dynamic Equity Slope (2024)
Working Paper: Dynamic Equity Slope (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cca:wpaper:626

Access Statistics for this paper

More papers in Carlo Alberto Notebooks from Collegio Carlo Alberto Contact information at EDIRC.
Bibliographic data for series maintained by Giovanni Bert ().