The Factor Structure of Time-Varying Discount Rates

77 Pages Posted: 27 Nov 2015 Last revised: 27 Jul 2017

See all articles by Victoria Atanasov

Victoria Atanasov

University of Mannheim

Ilan Cooper

BI Norwegian Business School

Richard Priestley

Norwegian Business School

Junhua Zhong

Donbei University of Finance and Economics; Research Center of Applied Finance

Date Written: June 1, 2017

Abstract

Discount rate variation is driven by a short run business cycle component and a longer run trend component. This leads to state variable hedging of these two components and ICAPM logic implies a three factor model for expected returns. The factors represent cash ‡ow news, short term discount rate news, and long term discount rate news. Both discount rate news components are important in describing the cross section of stock returns, and long run discount rate news commands a higher risk premium. Our results are consistent with any shape of the term structure of discount rates.

Keywords: Discount rates, risk factors, term structure of equity risk premium

JEL Classification: G12, G14

Suggested Citation

Atanasov, Victoria and Cooper, Ilan and Priestley, Richard and Zhong, Junhua, The Factor Structure of Time-Varying Discount Rates (June 1, 2017). Available at SSRN: https://ssrn.com/abstract=2695835 or http://dx.doi.org/10.2139/ssrn.2695835

Victoria Atanasov

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

Ilan Cooper (Contact Author)

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Richard Priestley

Norwegian Business School ( email )

Nydalsveien
37
N-0442 Oslo, 0283
Norway
47 46410515 (Phone)

Junhua Zhong

Donbei University of Finance and Economics ( email )

217 Jianshan St,
Shahekou
Dalian, Liaoning
China

Research Center of Applied Finance ( email )

217 Jianshan St,
Shahekou
Dalian, Liaoning
China

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