Why Do Discount Rates Vary?
52 Pages Posted: 9 Apr 2012 Last revised: 31 Dec 2019
Date Written: December 30, 2019
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: Suggested Citation