Term Structure of Risk in Expected Returns

82 Pages Posted: 4 Jan 2019 Last revised: 15 Jan 2019

See all articles by Irina Zviadadze

Irina Zviadadze

Stockholm School of Economics; Swedish House of Finance; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: December 20, 2018

Abstract

This article develops an empirical methodology to determine which economic shocks span risk in asset returns and fluctuations in discount rate and cash flow news. A theoretically motivated shock identification scheme in a present-value model identifies economic shocks. The choice of identifying restrictions is based on the properties of the term structure of risk in expected returns in the data and in equilibrium models. Empirically, I relate equity discount rate news and cash flow news to multiple sources of risk in the variance of consumption growth. Both types of news are almost equally important for the aggregate market risk.

Keywords: incremental expected return, incremental expected dividend, permanent and transient shocks

JEL Classification: C32, C52, G12

Suggested Citation

Zviadadze, Irina, Term Structure of Risk in Expected Returns (December 20, 2018). Swedish House of Finance Research Paper No. 19-1. Available at SSRN: https://ssrn.com/abstract=3304708 or http://dx.doi.org/10.2139/ssrn.3304708

Irina Zviadadze (Contact Author)

Stockholm School of Economics ( email )

PO Box 6501
Stockholm, 11383
Sweden

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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