Working Paper: CEPR ID: DP13414
Authors: Irina Zviadadze
Abstract: This article develops an empirical methodology to determine which economic shocks span risk in asset returns and fluctuations in discount rate and cash flow news. A theoretically motivated shock identification scheme in a present-value model identifies economic shocks. The choice of identifying restrictions is based on the properties of the term structure of risk in expected returns in the data and in equilibrium models. Empirically, I relate equity discount rate news and cash flow news to multiple sources of risk in the variance of consumption growth. Both types of news are almost equally important for the aggregate market risk.
Keywords: incremental expected return; incremental expected dividend; permanent and transient shocks
JEL Codes: C32; C52; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| variance of consumption growth (F62) | one-period stock returns (G17) |
| cash flow news (O16) | one-quarter stock returns (G17) |
| discount rate news (E43) | one-quarter stock returns (G17) |
| regular variance shock (C22) | revisions of multiperiod expected cash flow growth (D25) |
| direct dividend shock (G35) | revisions of multiperiod expected cash flow growth (D25) |