Production-Based Term Structure of Equity Returns

42 Pages Posted: 9 Oct 2013

See all articles by Mariano (Max) Massimiliano Croce

Mariano (Max) Massimiliano Croce

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

Hengjie Ai

University of Minnesota - Twin Cities - Carlson School of Management

Anthony M. Diercks

Board of Governors of the Federal Reserve System

Kai Li

HKUST Business School

Multiple version iconThere are 3 versions of this paper

Date Written: October 4, 2013

Abstract

We study the link between timing of cash flows and expected returns in general equilibrium production economies. Our model incorporates (i) heterogenous exposure to aggregate pro- ductivity shocks across capital vintages, and (ii) an endogenous stock of growth options. Our economy features a V-shaped term structure of aggregate dividends in which dividend yields decrease with maturity up to ten years, consistent with the empirical findings of Binsbergen et al. (2012a). Our model also reproduces the empirical negative relationship between cash-flow duration and expected returns in the cross section of book-to-market sorted stocks.

Keywords: Term Structure, Duration, Value Premium

Suggested Citation

Croce, Mariano Massimiliano and Ai, Hengjie and Diercks, Anthony M. and Li, Kai, Production-Based Term Structure of Equity Returns (October 4, 2013). UNC Kenan-Flagler Research Paper No. 2336099, Available at SSRN: https://ssrn.com/abstract=2336099 or http://dx.doi.org/10.2139/ssrn.2336099

Mariano Massimiliano Croce (Contact Author)

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

Hengjie Ai

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

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

HKUST Business School ( email )

Clear Water Bay
Kowloon
Hong Kong

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