Predictable Risks and Predictive Regression in Present-Value Models

96 Pages Posted: 15 Mar 2011 Last revised: 3 Aug 2017

See all articles by Ilaria Piatti

Ilaria Piatti

University of Oxford - Said Business School

Fabio Trojani

Swiss Finance Institute; University of Geneva

Date Written: July 31, 2017

Abstract

Using a latent variables approach, we estimate the dynamics of dividends and returns in a tractable present-value model with time-varying risks. Expected returns imply a similar return predictability as under homoskedasticity, while expected dividend growth is more persistent and explains a small fraction of future dividends. Stochastically mean reverting dividends and returns are linked to a time-varying predictability, a stochastic decomposition of price-dividend ratio variances and a closed-form decomposition of cash-flow, discount rate and volatility news in an intertemporal CAPM. The estimated model also implies economically plausible time-varying term structures of dividend-return expectations and risks.

Keywords: Predictability, Present-value models, Predictive regression, Persistence, Term structure of risk

JEL Classification: G12, C22

Suggested Citation

Piatti, Ilaria and Trojani, Fabio, Predictable Risks and Predictive Regression in Present-Value Models (July 31, 2017). Saïd Business School WP 2017-11. Available at SSRN: https://ssrn.com/abstract=1786897 or http://dx.doi.org/10.2139/ssrn.1786897

Ilaria Piatti (Contact Author)

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

Fabio Trojani

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

University of Geneva ( email )

Geneva
Switzerland

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