Journal of Financial Economics Vol. 74 No. 3 2004
Corporate earnings and the equity premium
Abstract
Corporate cash flows are highly volatile and strongly procyclical. We examine the asset-pricing implications of the sensitivity of corporate cash flows to economic shocks within a continuous-time model in which dividends are a stochastic fraction of aggregate consumption. We provide closed-form solutions for stock values and show that the equity premium can be represented as the sum of three components which we call the consumption-risk, event-risk, and corporate-risk premia. Calibrated to historical data, the model implies a total equity premium many times larger than in the standard model. The model also generates levels of equity volatility consistent with those experienced in the stock market.
- DOI
- 10.1016/j.jfineco.2003.12.001
- Volume
- 74
- Issue
- 3
- Pages
- 401-421
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref