The Response of Equity Yields to a Long-Run Shock

Abstract

We study how macroeconomic developments affect asset prices by analyzing the response of granular equity yields to a well-identified long-run growth shock. Using synthetic equity yield data from Giglio et al. (2023), we find that a positive long- run shock steepens the equity yield curve by increasing expected dividend growth, especially for short-term claims, while discount rates remain largely unchanged. We also highlight the distinct responses of growth versus value firms and of cash versus total firm payout. We show that the production-based model of Ai et al. (2018) aligns better with these responses than benchmark equity term structure models, providing new insights into the macro-finance connection.

Keywords: Equity term structure, TFP news shock, equity yields, dividend growth, discount rate