Working Paper: NBER ID: w31119
Authors: Stefano Giglio; Bryan T. Kelly; Serhiy Kozak
Abstract: We use a large cross-section of equity returns to estimate a rich affine model of equity prices, dividends, returns and their dynamics. Using the model, we price dividend strips of the aggregate market index, as well as any other well-diversified equity portfolio. We do not use any dividend strips data in the estimation of the model; however, model-implied equity yields generated by the model match closely the equity yields from the traded dividend forwards reported in the literature. Our model can be used to extend the data on the term structure of aggregate (market) discount rates over time (back to the 1970s) and across maturities, since we are not limited by the maturities of actually traded dividend claims. Most importantly, the model generates term structures for any portfolio of stocks (e.g., small and value portfolios, high and low investment portfolios, etc). The novel cross-section of term structure data estimated by our model, covering a span of 45 years that includes several recessions, represents a rich set of new empirical moments that can be used to guide and evaluate asset pricing models, beyond the aggregate term structure of dividend strips that has been studied in the literature.
Keywords: Equity Returns; Discount Rates; Asset Pricing Models
JEL Codes: G11; G12; G13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| stochastic discount factor (SDF) (D15) | equity prices (G12) |
| stochastic discount factor (SDF) (D15) | dividends (G35) |
| stochastic discount factor (SDF) (D15) | excess returns (D46) |
| factor returns (G12) | stochastic discount factor (SDF) (D15) |
| economic conditions (E66) | discount rates (E43) |
| equity prices (G12) | term structures (E43) |
| dividends (G35) | term structures (E43) |
| returns (Y60) | term structures (E43) |
| SMB portfolio (G24) | term structure (E43) |
| HML portfolio (G11) | term structure (E43) |