Why Do Discount Rates Vary?

52 Pages Posted: 9 Apr 2012 Last revised: 31 Dec 2019

See all articles by Serhiy Kozak

Serhiy Kozak

University of Maryland - Robert H. Smith School of Business

Shrihari Santosh

University of Colorado at Boulder - Department of Finance; University of Maryland - R.H. Smith School of Business

Date Written: December 30, 2019

Abstract

The price of discount rate risk reveals whether increases in equity risk premia represent good or bad news to rational investors. Employing a new empirical methodology, we find that the price is negative, which suggests that discount rates are high during times of high marginal utility of wealth. Our approach relies on using future realized market returns to consistently estimate covariances of asset returns with the market risk premium. Covariances drive observed patterns in a broad cross section of stock and bond expected returns.

Keywords: risk premium, CAPM, ICAPM, discount rates, hedging demand

JEL Classification: G12, G14

Suggested Citation

Kozak, Serhiy and Santosh, Shrihari, Why Do Discount Rates Vary? (December 30, 2019). Available at SSRN: https://ssrn.com/abstract=2037521 or http://dx.doi.org/10.2139/ssrn.2037521

Serhiy Kozak (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

7621 Mowatt Ln
College Park, MD 20742
United States

HOME PAGE: http://serhiykozak.com

Shrihari Santosh

University of Colorado at Boulder - Department of Finance ( email )

Campus Box 419
Boulder, CO 80309
United States

University of Maryland - R.H. Smith School of Business ( email )

Robert H. Smith School of Business
Van Munching Hall
College Park, MD 20742
United States

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