News Shocks and the Production-Based Term Structure of Equity Returns

70 Pages Posted: 5 Feb 2018

See all articles by Hengjie Ai

Hengjie Ai

University of Wisconsin-Madison

Mariano (Max) Massimiliano Croce

Finance Department, Bocconi University; Centre for Economic Policy Research (CEPR)

Anthony M. Diercks

Board of Governors of the Federal Reserve System

Kai Li

Peking University HSBC Business School

Multiple version iconThere are 3 versions of this paper

Date Written: January 2018

Abstract

We propose a production-based general equilibrium model to study the link between timing of cash flows and expected returns both in the cross section of stocks and along the aggregate equity term structure. Our model incorporates long-run growth news with time-varying volatility and slow learning about the exposure that firms have with respect to these shocks. Our framework provides a unified explanation of the stylized features of the slope of the term structure of equity returns, its variations over the business cycle, and the negative relationship between cash-flow duration and expected returns in the cross section of book- to-market-sorted portfolios.

JEL Classification: E2, E3, G1

Suggested Citation

Ai, Hengjie and Croce, Mariano Massimiliano and Diercks, Anthony M. and Li, Kai, News Shocks and the Production-Based Term Structure of Equity Returns (January 2018). CEPR Discussion Paper No. DP12661, Available at SSRN: https://ssrn.com/abstract=3118288

Hengjie Ai (Contact Author)

University of Wisconsin-Madison ( email )

975 University Avenue
Madison, WI 53706
United States
6088903881 (Phone)

HOME PAGE: http://www.hengjieai.com

Mariano Massimiliano Croce

Finance Department, Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

HOME PAGE: http://sites.google.com/view/mmcroce/home

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Anthony M. Diercks

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Kai Li

Peking University HSBC Business School ( email )

+86 755 26032023 (Phone)

HOME PAGE: http://sites.google.com/site/kailiwebpage

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