Price-Dividend Ratio Factor Proxies for Long-Run Risks

Ravi Jagannathan and Srikant Marakani

The Review of Asset Pricing Studies, 2015, vol. 5, issue 1, 1-47

Abstract: We show that several asset pricing models that rely on long-run risks imply that the state of the economy can be captured by factors derived from the price-dividend ratios of stock portfolios. We find two factors with small growth and large value tilts are important for this purpose, thereby relating the Fama-French model and the Bansal-Yaron and Merton intertemporal asset pricing models. As predicted by the model, these price-dividend ratio factors track consumption volatility and predict future consumption and stock dividends, and the covariance of returns with their innovations explains the cross-section of average returns of several stock portfolios.

JEL-codes: G19 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (6)

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Working Paper: Price Dividend Ratio Factors: Proxies for Long Run Risk (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:oup:rasset:v:5:y:2015:i:1:p:1-47.

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