The Review of Asset Pricing Studies Vol. 5 No. 1 2015

Price-Dividend Ratio Factor Proxies for Long-Run Risks

Ravi Jagannathan¹; Srikant Marakani²

¹ Kellogg School of Management, Northwestern University and NBER, Indian School of Business and Shanghai Advanced Institute of Finance · ² Department of Economics and Finance, City University of Hong Kong

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.

DOI

10.1093/rapstu/rav003

Volume

5

Issue

1

Pages

1-47

Language

en

Sources

openalex crossref bibtex:phds-export.bib

Cite

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