Working Paper: NBER ID: w9217
Authors: Lior Menzly; Tano Santos; Pietro Veronesi
Abstract: In this paper we propose a general equilibrium model that successfully reproduces the historical experience of the cross section of US stock prices as well as the realized history of the market portfolio. The model achieves this while addressing traditional concerns in the asset pricing literature: A high equity premium and volatility of returns, the long horizon predictability, and a low volatility of the risk free rate. The model combines a rich payoff structure with a habit persistence discount factor, which allows us to identify the effect on prices of idiosyncratic cash flow shocks versus business cycle components.
Keywords: No keywords provided
JEL Codes: G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| shocks to expected rates of return (G17) | fluctuations in the price-dividend ratio of the market portfolio (G19) |
| differences in how each industry responds to cash flow news (G14) | variance of log price-dividend ratios across industries (C46) |
| differences in how each industry responds to discount rate news (E43) | variance of log price-dividend ratios across industries (C46) |
| cash flow shocks (F32) | price-dividend ratios (for industries like railroads) (G35) |
| shocks to discount rates (E43) | price-dividend ratios (for industries like paper) (G35) |
| cash flow shocks (F32) | asset prices (varying impacts depending on business cycle phase) (E32) |
| idiosyncratic cash flow shocks (G59) | asset prices (G19) |
| aggregate cash flow shocks (E19) | asset prices (G19) |