Dynamic Equity Slope

82 Pages Posted: 19 Aug 2020 Last revised: 22 Jul 2022

See all articles by Matthijs Breugem

Matthijs Breugem

University of Turin - Collegio Carlo Alberto

Stefano Colonnello

Ca Foscari University of Venice; Halle Institute for Economic Research

Roberto Marfè

University of Turin - Collegio Carlo Alberto

Francesca Zucchi

European Central Bank

Multiple version iconThere are 2 versions of this paper

Date Written: June 30, 2020

Abstract

This paper empirically documents that expected growth volatility is a key driver of the equity term structure dynamics. A general equilibrium model jointly explains four important patterns: (i) a potentially negative unconditional equity term premium, (ii) countercyclical equity term premia, (iii) procyclical equity yields, and (iv) premia to value and growth claims respectively increasing and at with the horizon. The economic mechanism hinges on the interaction between heteroscedastic long-term growth, which leads to countercyclical risk premia, and homoscedastic short-term shocks under limited market participation, which produce sizable risk premia to short-term cash flows. The equity slope dynamics hold irrespective of the sign of its unconditional average.

Keywords: term structure of equity, price dynamics, general equilibrium, expected growth volatility

JEL Classification: D51, D53, E30, G10, G12

Suggested Citation

Breugem, Matthijs and Colonnello, Stefano and Marfè, Roberto and Zucchi, Francesca, Dynamic Equity Slope (June 30, 2020). Available at SSRN: https://ssrn.com/abstract=3657285 or http://dx.doi.org/10.2139/ssrn.3657285

Matthijs Breugem

University of Turin - Collegio Carlo Alberto ( email )

Piazza Albarello 8
Torino, Torino 10122
Italy

Stefano Colonnello

Ca Foscari University of Venice ( email )

Dorsoduro 3246
Venice, Veneto 30123
Italy

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Roberto Marfè (Contact Author)

University of Turin - Collegio Carlo Alberto ( email )

Piazza Arbarello 8
Torino, Torino 10122
Italy

Francesca Zucchi

European Central Bank ( email )

Sonnemannstrasse 20
Frankfurt am Main, 60314
Germany

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