Dynamic Equity Slope

62 Pages Posted: 12 Jan 2021

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

Federal Reserve Board

Multiple version iconThere are 2 versions of this paper

Date Written: July 30, 2020

Abstract

The term structure of equity and its cyclicality are key to understand the risks driving equilibrium asset prices. We propose a general equilibrium model that jointly explains four important features of the term structure of equity: (i) a negative unconditional term premium, (ii) countercyclical term premia, (iii) procyclical equity yields, and (iv) premia to value and growth claims respectively increasing and decreasing with the horizon. The economic mechanism hinges on the interaction between heteroskedastic long-run growth – which helps price long-term cash flows and leads to countercyclical risk premia – and homoskedastic short-term shocks in the presence of limited market participation – which produce sizeable risk premia to short-term cash flows. The slope dynamics hold irrespective of the sign of its unconditional average. We provide empirical support to our model assumptions and predictions.

Keywords: Term Structure of Equity, 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 (July 30, 2020). University Ca' Foscari of Venice, Dept. of Economics Research Paper Series No. 21/WP/2020, Available at SSRN: https://ssrn.com/abstract=3764505 or http://dx.doi.org/10.2139/ssrn.3764505

Matthijs Breugem

University of Turin - Collegio Carlo Alberto ( email )

Piazza Albarello 8
Torino, Torino 10122
Italy

Stefano Colonnello (Contact Author)

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

University of Turin - Collegio Carlo Alberto ( email )

Piazza Arbarello 8
Torino, Torino 10122
Italy

Francesca Zucchi

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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