Predictable Risks and Predictive Regression in Present-Value Models
96 Pages Posted: 15 Mar 2011 Last revised: 3 Aug 2017
Date Written: July 31, 2017
Using a latent variables approach, we estimate the dynamics of dividends and returns in a tractable present-value model with time-varying risks. Expected returns imply a similar return predictability as under homoskedasticity, while expected dividend growth is more persistent and explains a small fraction of future dividends. Stochastically mean reverting dividends and returns are linked to a time-varying predictability, a stochastic decomposition of price-dividend ratio variances and a closed-form decomposition of cash-flow, discount rate and volatility news in an intertemporal CAPM. The estimated model also implies economically plausible time-varying term structures of dividend-return expectations and risks.
Keywords: Predictability, Present-value models, Predictive regression, Persistence, Term structure of risk
JEL Classification: G12, C22
Suggested Citation: Suggested Citation