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

67 Pages Posted: 18 Nov 2012 Last revised: 5 Sep 2017

Hengjie Ai

University of Minnesota - Twin Cities - Carlson School of Management

Mariano (Max) Massimiliano Croce

University of North Carolina Kenan-Flagler Business School; Centre for Economic Policy Research (CEPR)

Anthony M. Diercks

Board of Governors of the Federal Reserve System: Monetary and Financial Market Analysis

Kai Li

Hong Kong University of Science & Technology (HKUST) - HKUST School of Business and Management

Multiple version iconThere are 3 versions of this paper

Date Written: September 4, 2017

Abstract

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.

Keywords: News Shocks, Learning, Term Structure of Equity, Duration

JEL Classification: E2, E3, G1

Suggested Citation

Ai, Hengjie and Croce, Mariano (Max) Massimiliano and Diercks, Anthony M. and Li, Kai, News Shocks and the Production-Based Term Structure of Equity Returns (September 4, 2017). Available at SSRN: https://ssrn.com/abstract=2177191 or http://dx.doi.org/10.2139/ssrn.2177191

Hengjie Ai

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

Mariano Massimiliano Croce (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

McColl Builiding
Chapel Hill, NC North Carolina 27599-3490
United States

HOME PAGE: http://https://sites.google.com/view/mmcroce/home

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Anthony M. Diercks

Board of Governors of the Federal Reserve System: Monetary and Financial Market Analysis ( email )

20th and C Streets, NW
Washington, DC 20551
United States

Kai Li

Hong Kong University of Science & Technology (HKUST) - HKUST School of Business and Management ( email )

Clear Water Bay
Kowloon
Hong Kong

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