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

Hengjie Ai, Mariano Massimiliano Croce, Anthony Diercks and Kai Li

No 12661, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

JEL-codes: E2 E3 G1 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2018-01
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