The Asset Pricing-Macro Nexus and Return-Cash Flow Predictability

45 Pages Posted: 15 Mar 2011

See all articles by Ravi Bansal

Ravi Bansal

Duke University and NBER

Yaron A. A.

affiliation not provided to SSRN

Date Written: March 15, 2011

Abstract

In this paper we develop a measure of aggregate dividends (net payout) and a corresponding valuation ratio that incorporate the economic restrictions that all outstanding equity should be held by investors. Using this market clearing based aggregate measure of payouts changes the traditional views on the sources of asset price variation; with the aggregate dividend measure, a lot of the asset price variation is due to predictability of payout growth. In addition, the new aggregate payout measure is naturally cointegrated with aggregate consumption. We develop a long-run risks based economic model that incorporates this restriction. We show that the model can account for the return and payout growth predictability needed to explain the asset price variation in conjunction with the risk premium and volatility puzzles.

Keywords: Long Run Risks, Cointegration, aggregate dividends

JEL Classification: G10

Suggested Citation

Bansal, Ravi and A., Yaron A., The Asset Pricing-Macro Nexus and Return-Cash Flow Predictability (March 15, 2011). Available at SSRN: https://ssrn.com/abstract=1786144 or http://dx.doi.org/10.2139/ssrn.1786144

Ravi Bansal (Contact Author)

Duke University and NBER ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7758 (Phone)
919-660-8038 (Fax)

Yaron A. A.

affiliation not provided to SSRN ( email )

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