A Macro-Finance Term Structure Model for Bond and Dividend Discount Rates

54 Pages Posted: 12 Jun 2019

See all articles by Stephan Florig

Stephan Florig

Karlsruhe Institute of Technology

Maxim Ulrich

Karlsruhe Institute of Technology

Sven Schoemer

Karlsruhe Institute of Technology

Date Written: May 24, 2019

Abstract

We present an arbitrage-free affine term structure model that jointly prices U.S. Treasury bonds, S&P 500 dividend strips and the S&P 500 equity index as a function of the economy. Our model allows us to extract new insights on how short- and long-duration dividends and their discount rates respond to changes in the economy. Within the affine model, we obtain accurate decompositions of discount rates into risk free rates, inter est rate and dividend risk premiums. Our model is able to price bond and equity claims with high precision and predict economic variables and returns in bonds and short-horizon dividends.

Keywords: Bond Risk Premium, Dividend Risk Premium, Term Structure Model

JEL Classification: G12, E44

Suggested Citation

Florig, Stephan and Ulrich, Maxim and Schoemer, Sven, A Macro-Finance Term Structure Model for Bond and Dividend Discount Rates (May 24, 2019). Available at SSRN: https://ssrn.com/abstract=3394850 or http://dx.doi.org/10.2139/ssrn.3394850

Stephan Florig (Contact Author)

Karlsruhe Institute of Technology ( email )

Kaiserstraße 12
Karlsruhe, Baden Württemberg 76131
Germany

Maxim Ulrich

Karlsruhe Institute of Technology ( email )

Bluecherstrasse 17
Karlsruhe, Baden Württemberg 76131
Germany
+4972160844270 (Phone)

HOME PAGE: http://risk.fbv.kit.edu/c-ram

Sven Schoemer

Karlsruhe Institute of Technology ( email )

Kaiserstraße 12
Karlsruhe, Baden Württemberg 76131
Germany

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