Working Paper: NBER ID: w31596
Authors: Sebastian Di Tella; Benjamin M. Hbert; Pablo Kurlat; Qitong Wang
Abstract: We use equity returns to construct a time-varying measure of the interest rate that we call the zero-beta rate: the expected return of a stock portfolio orthogonal to the stochastic discount factor. The zero-beta rate is high and volatile. In contrast to safe rates, the zero-beta rate fits the aggregate consumption Euler equation remarkably well, both unconditionally and conditional on monetary shocks, and can explain the level and volatility of asset prices. We claim that the zero-beta rate is the correct intertemporal price.
Keywords: zerobeta rate; equity returns; intertemporal price; aggregate consumption; monetary policy
JEL Codes: E30; E4; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| zerobeta rate (C46) | consumption growth (E20) |
| monetary policy (E52) | zerobeta rate (C46) |
| unexpected monetary tightening (E49) | zerobeta rate (C46) |
| unexpected monetary tightening (E49) | treasury bill yield (E43) |
| zerobeta rate (C46) | asset prices (G19) |