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Why do discount rates vary?

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  • Kozak, Serhiy
  • Santosh, Shrihari

Abstract

The price of discount rate risk reveals whether increases in equity risk premia represent good or bad news to rational investors. Employing a new empirical methodology, we find that the price is negative, which suggests that discount rates are high during times of high marginal utility of wealth. Our approach relies on using future realized market returns to consistently estimate covariances of asset returns with the market risk premium. Covariances drive observed patterns in a broad cross section of stock and bond expected returns.

Suggested Citation

  • Kozak, Serhiy & Santosh, Shrihari, 2020. "Why do discount rates vary?," Journal of Financial Economics, Elsevier, vol. 137(3), pages 740-751.
    • Handle: RePEc:eee:jfinec:v:137:y:2020:i:3:p:740-751
    DOI: 10.1016/j.jfineco.2020.04.004
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    References listed on IDEAS

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    Cited by:

    1. Indrajit Mitra & Taeuk Seo & Yu Xu, 2021. "High Discounts and Low Fundamental Surplus: An Equivalence Result for Unemployment Fluctuations," FRB Atlanta Working Paper 2021-22, Federal Reserve Bank of Atlanta.
    2. Nian, Victor & Mignacca, Benito & Locatelli, Giorgio, 2022. "Policies toward net-zero: Benchmarking the economic competitiveness of nuclear against wind and solar energy," Applied Energy, Elsevier, vol. 320(C).
    3. Roberto Gómez‐Cram, 2022. "Late to Recessions: Stocks and the Business Cycle," Journal of Finance, American Finance Association, vol. 77(2), pages 923-966, April.
    4. Kozak, Serhiy, 2022. "Dynamics of bond and stock returns," Journal of Monetary Economics, Elsevier, vol. 126(C), pages 188-209.
    5. Kroencke, Tim A., 2022. "Recessions and the stock market," Journal of Monetary Economics, Elsevier, vol. 131(C), pages 61-77.

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    More about this item

    Keywords

    Risk premium; CAPM; ICAPM; Discount rates; Hedging demand;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G40 - Financial Economics - - Behavioral Finance - - - General

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