65 Pages Posted: 14 Oct 2018 Last revised: 2 Sep 2021
Date Written: November 17, 2018
The volatility of total factor productivity (TFP) is shown to have similar long-run predictive ability for market returns to the dividend price ratio. When seen through an asset pricing lens, this finding implies that TFP volatility should also predict real cash flows and/or real interest rates: it is found to mainly predict real cash flows through inflation rates. A model with endogenous growth, Epstein-Zin preferences and price rigidities reconciles both uncertainty-driven long-run predictability and its real implications. Within the model we justify why alternative no- tions of uncertainty have similar predictive ability as TFP volatility provided their low-frequency signal is extracted.
Keywords: uncertainty trends, valuation ratios, endogenous growth, price rigidities, financial uncertainty
JEL Classification: C22, E32, E44, G12, G17
Suggested Citation: Suggested Citation