Term Structure of Risk in Expected Returns
82 Pages Posted: 4 Jan 2019 Last revised: 15 Jan 2019
Date Written: December 20, 2018
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: Suggested Citation