News Shocks and the Production-Based Term Structure of Equity Returns

Hengjie Ai, Mariano Max Croce, Anthony M Diercks and Kai Li

The Review of Financial Studies, 2018, vol. 31, issue 7, 2423-2467

Abstract: We propose a production-based general equilibrium model to study the link between timing of cash flows and expected returns, both in the cross-section of stocks and along the aggregate equity term structure. Our model incorporates long-run growth news with time-varying volatility and slow learning about the exposure that firms have with respect to these shocks. Our framework provides a unified explanation of the stylized features of the slope of the term structure of equity returns, its variations over the business cycle, and the negative relationship between cash-flow duration and expected returns in the cross-section of book-to-market-sorted portfolios. Received May 27, 2017; editorial decision October 12, 2017 by Editor Itay Goldstein.

Date: 2018
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