DP12661 News Shocks and the Production-Based Term Structure of Equity Returns

Author(s): Hengjie Ai, Mariano Massimiliano Croce, Anthony Diercks, Kai Li
Publication Date: January 2018
Keyword(s):
JEL(s): E2, E3, G1
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12661

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.