Return predictability with endogenous growth

Federico M. Bandi, Lorenzo Bretscher and Andrea Tamoni

Journal of Financial Economics, 2023, vol. 150, issue 3

Abstract: The component of the volatility of total factor productivity (TFP) that is orthogonal to the dividend price ratio is shown to have long-run predictive ability for excess market returns. This finding implies that TFP volatility should also predict real cash flows and/or real interest rates: it is found to mainly predict real cash flows through inflation. A model with endogenous growth, Epstein-Zin preferences and price rigidities reconciles both TFP volatility-driven long-run predictability and its real implications. Within the model, we justify the similar (to that of TFP volatility) predictive ability of a low-frequency notion of market volatility as well as the cross-sectional pricing of TFP volatility risk in alternative asset classes.

Keywords: TFP volatility; Uncertainty trends; Endogenous growth; Price rigidities (search for similar items in EconPapers)
JEL-codes: C22 E32 E44 G12 G17 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:150:y:2023:i:3:s0304405x23001642

DOI: 10.1016/j.jfineco.2023.103724

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