Price-dividend ratio factor proxies for long-run risks

Ravi Jagannathan*, Srikant Marakani

*Corresponding author for this work

Research output: Contribution to journalArticle

4 Scopus citations

Abstract

We show that several asset pricing models that rely on long-run risks imply that the state of the economy can be captured by factors derived from the price-dividend ratios of stock portfolios. We find two factors with small growth and large value tilts are important for this purpose, thereby relating the Fama-French model and the Bansal-Yaron and Merton intertemporal asset pricing models. As predicted by the model, these price-dividend ratio factors track consumption volatility and predict future consumption and stock dividends, and the covariance of returns with their innovations explains the cross-section of average returns of several stock portfolios.

Original languageEnglish (US)
Pages (from-to)1-47
Number of pages47
JournalReview of Asset Pricing Studies
Volume5
Issue number1
DOIs
StatePublished - Jan 1 2015

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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