Working Paper: CEPR ID: DP12661
Authors: Hengjie Ai; Mariano Massimiliano Croce; Anthony Diercks; Kai Li
Abstract: We propose a production-based general equilibrium model to study the link between timing ofcash flows and expected returns both in the cross section of stocks and along the aggregateequity term structure. Our model incorporates long-run growth news with time-varyingvolatility and slow learning about the exposure that firms have with respect to these shocks.Our framework provides a unified explanation of the stylized features of the slope of theterm structure of equity returns, its variations over the business cycle, and the negativerelationship between cash-flow duration and expected returns in the cross section of book-to-market-sorted portfolios.
Keywords: Production; Economy; Term Structure; Learning
JEL Codes: E2; E3; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| cash flow timing (D25) | expected returns (G17) |
| cash flow duration (C41) | expected returns (G17) |
| recessions (E32) | slope of the term structure of equity returns (G12) |
| productivity shocks (O49) | investment responses (G11) |
| information about exposure to productivity shocks (E24) | investment responses (G11) |
| volatility of productivity shocks (O49) | slope of the term structure of equity returns (G12) |
| cash flow duration (C41) | stochastic discount factor (D15) |
| stochastic discount factor (D15) | expected returns (G17) |
| cash flow process (G29) | expected returns (G17) |