Journal of Financial Economics Vol. 150 No. 3 2023
Return predictability with endogenous growth
Abstract
The component of the volatility of total factor productivity (TFP) that is orthogonal to the dividend price ratio is shown to have long-run predictive ability for excess market returns. This finding implies that TFP volatility should also predict real cash flows and/or real interest rates: it is found to mainly predict real cash flows through inflation. A model with endogenous growth, Epstein-Zin preferences and price rigidities reconciles both TFP volatility-driven long-run predictability and its real implications. Within the model, we justify the similar (to that of TFP volatility) predictive ability of a low-frequency notion of market volatility as well as the cross-sectional pricing of TFP volatility risk in alternative asset classes.
- DOI
- 10.1016/j.jfineco.2023.103724
- Volume
- 150
- Issue
- 3
- Pages
- 103724
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref