Term Structures of Equity and Interest Rates in Time-Varying Expected Growth Models

39 Pages Posted: 2 Jun 2020

See all articles by Michael Hasler

Michael Hasler

University of Texas at Dallas, Naveen Jindal School of Management, Department of Finance

Mariana Khapko

University of Toronto - Finance Area; Swedish House of Finance

Date Written: April 20, 2020

Abstract

Equilibrium asset-pricing models with time-varying expected economic growth have been criticized for their apparent inability to generate an upward-sloping yield curve and downward-sloping term structures of equity risk and risk premium. We theoretically investigate the model-implied equilibrium relationships between the shape of these term structures, the dynamics of economic fundamentals, and the representative agent's preferences. We show that this class of models is, in fact, flexible in its ability to reproduce the aforementioned shapes, while also generating realistic asset-pricing moments.

Keywords: Term Structures, Dividend Strips, Risk Premium, Volatility, Bond Yields

JEL Classification: D51, D53, G12, G13

Suggested Citation

Hasler, Michael and Khapko, Mariana, Term Structures of Equity and Interest Rates in Time-Varying Expected Growth Models (April 20, 2020). Available at SSRN: https://ssrn.com/abstract=3590248 or http://dx.doi.org/10.2139/ssrn.3590248

Michael Hasler (Contact Author)

University of Texas at Dallas, Naveen Jindal School of Management, Department of Finance ( email )

800 West Campbell
Richarson, TX 75080
United States

Mariana Khapko

University of Toronto - Finance Area ( email )

Toronto, Ontario M5S 3E6
Canada

Swedish House of Finance ( email )

Drottninggatan 98
Stockholm
Sweden

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