Corporate Fraction and the Equilibrium Term Structure of Equity Risk

Roberto Marfe ()

Review of Finance, 2016, vol. 20, issue 2, 855-905

Abstract: The recent empirical evidence of a downward-sloping term structure of equity risk is viewed as a challenge to many leading asset pricing models. This article analytically characterizes conditions under which a continuous-time long-run risk model can accommodate the stylized facts about dividend and equity risk, when dividends are a stationary stochastic fraction of aggregate consumption. Such a cointegrating relation not only makes dividends riskier in the short run than at medium horizons but also preserves the role of long-run risk: consequently, the model captures both the traditional puzzles, like the high equity premium, as well as the new evidence about the term structure of equity risk.

Date: 2016
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Working Paper: Corporate Fraction and the Equilibrium Term-Structure of Equity Risk (2015)
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