Working Paper: NBER ID: w16972
Authors: John H. Cochrane
Abstract: Discount rate variation is the central organizing question of current asset pricing research. I survey facts, theories and applications. We thought returns were uncorrelated over time, so variation in price-dividend ratios was due to variation in expected cashflows. Now it seems all price-dividend variation corresponds to discount-rate variation. We thought that the cross-section of expected returns came from the CAPM. Now we have a zoo of new factors. I categorize discount-rate theories based on central ingredients and data sources. Discount-rate variation continues to change finance applications, including portfolio theory, accounting, cost of capital, capital structure, compensation, and macroeconomics.
Keywords: Discount Rates; Asset Pricing; Expected Returns
JEL Codes: G0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Dividend Yield (G35) | Expected Returns (G17) |
| Price-Dividend Ratios (G35) | Expected Returns (G17) |
| Discount Rates Variation (E43) | Expected Returns (G17) |
| Discount Rates Variation (E43) | Asset Pricing Anomalies (G19) |