Discount Rates and Cash Flows: A Local Projection Approach

71 Pages Posted: 22 May 2019 Last revised: 1 Oct 2019

See all articles by Matthijs Lof

Matthijs Lof

Aalto University

Henri Nyberg

University of Turku; Tampere University

Date Written: September 18, 2019


We develop a volatility decomposition derived from flexible and robust local projections to quantify the relative contributions of expected discount rates and cash flows to the variation of dividend yields. Local projections enable the incorporation of large information sets, the use of monthly data along with annual data, and to consider time variation in the volatility decomposition. While the variation of expected discount rates remains the dominant contributor to market volatility, we find that the contribution of expected cash flows is non-negligible when moving beyond the standard model with the dividend yield as the single state variable.

Keywords: volatility decomposition, dividend growth, local projections, LASSO

JEL Classification: C32, G12

Suggested Citation

Lof, Matthijs and Nyberg, Henri, Discount Rates and Cash Flows: A Local Projection Approach (September 18, 2019). Proceedings of Paris December 2019 Finance Meeting EUROFIDAI - ESSEC, Available at SSRN: or

Matthijs Lof (Contact Author)

Aalto University ( email )

P.O. Box 21210
Helsinki, 00101


Henri Nyberg

University of Turku ( email )

Turku, 20014

Tampere University ( email )

Tampere, FIN-33101

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