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Dynamic Equity Slope

Author

Listed:
  • Matthijs Breugem
  • Stefano Colonnello
  • Roberto Marfè
  • Francesca Zucchi
Abstract
The term structure of equity and its cyclicality are key to understand the risks driving equilibrium asset prices. We propose a general equilibrium model that jointly explains four important features of the term structure of equity: (i) a negative unconditional term premium, (ii) countercyclical term premia, (iii) procyclical equity yields, and (iv) premia to value and growth claims respectively increasing and decreasing with the horizon. The economic mechanism hinges on the interaction between heteroskedastic long-run growth—which helps price long-term cash flows and leads to countercyclical risk premia—and homoskedastic short-term shocks in the presence of limited market participation — which produce sizeable risk premia to short-term cash flows. The slope dynamics hold irrespective of the sign of its unconditional average. We provide empirical support to our model assumptions and predictions.

Suggested Citation

  • Matthijs Breugem & Stefano Colonnello & Roberto Marfè & Francesca Zucchi, 2020. "Dynamic Equity Slope," Carlo Alberto Notebooks 626, Collegio Carlo Alberto.
    • Handle: RePEc:cca:wpaper:626
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    1. Matthijs Breugem & Roberto Marfè & Francesca Zucchi, 2020. "Corporate Policies and the Term Structure of Risk," Carlo Alberto Notebooks 627, Collegio Carlo Alberto.

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    More about this item

    Keywords

    Term Structure of Equity; Dynamics; General Equilibrium; Expected Growth Volatility.;
    All these keywords.

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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