Discount Rates and Cash Flows: A Local Projection Approach
73 Pages Posted: 22 May 2019 Last revised: 17 Jun 2021
Date Written: June 15, 2021
We develop a volatility decomposition derived from flexible 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. By expanding the set of state variables and allowing for time-varying parameters, we find that while the variation of expected discount rates remains generally the dominant contributor to market volatility, the contribution of expected cash flows is by no means negligible.
Keywords: volatility decomposition, dividend growth, local projections
JEL Classification: C32, G12
Suggested Citation: Suggested Citation