The term structures of equity and interest rates / Martin Lettau, Jessica A. Wachter.
Material type:
TextSeries: Working paper series (National Bureau of Economic Research) ; no. 14698.Publication details: Cambridge, Mass. : National Bureau of Economic Research, 2009Description: 27, [22] p. : ill. ; 22 cmSubject(s): Interest rates -- Econometric models | Stocks -- Prices -- Econometric models | Risk perceptionLOC classification: HB1 | .N38 no. 14698Online resources: Click here to access online Summary: This paper proposes a dynamic risk-based model capable of jointly explaining the term structure of interest rates, returns on the aggregate market and the risk and return characteristics of value and growth stocks. Both the term structure of interest rates and returns on value and growth stocks convey information about how the representative investor values cash flows of different maturities. We model how the representative investor perceives risks of these cash flows by specifying a parsimonious stochastic discount factor for the economy. Shocks to dividend growth, the real interest rate, and expected inflation are priced, but shocks to the price of risk are not. Given reasonable assumptions for dividends and inflation, we show that the model can simultaneously account for the behavior of aggregate stock returns, an upward-sloping yield curve, the failure of the expectations hypothesis and the poor performance of the capital asset pricing model.
| Item type | Current library | Collection | Call number | Copy number | Status | Date due | Barcode |
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University of Macedonia Library Βιβλιοστάσιο Β (Stack Room B) | Research Papers | HB1.N38 no. 14698 (Browse shelf (Opens below)) | 1 | Available | 0013125565 |
Includes bibliographical references.
This paper proposes a dynamic risk-based model capable of jointly explaining the term structure of interest rates, returns on the aggregate market and the risk and return characteristics of value and growth stocks. Both the term structure of interest rates and returns on value and growth stocks convey information about how the representative investor values cash flows of different maturities. We model how the representative investor perceives risks of these cash flows by specifying a parsimonious stochastic discount factor for the economy. Shocks to dividend growth, the real interest rate, and expected inflation are priced, but shocks to the price of risk are not. Given reasonable assumptions for dividends and inflation, we show that the model can simultaneously account for the behavior of aggregate stock returns, an upward-sloping yield curve, the failure of the expectations hypothesis and the poor performance of the capital asset pricing model.
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