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News Shocks and the Production-Based Term Structure of Equity Returns

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  • Hengjie Ai
  • Mariano Max Croce
  • Anthony M Diercks
  • Kai Li

Abstract

We propose a production-based general equilibrium model to study the link between timing of cash flows and expected returns, both in the cross-section of stocks and along the aggregate equity term structure. Our model incorporates long-run growth news with time-varying volatility and slow learning about the exposure that firms have with respect to these shocks. Our framework provides a unified explanation of the stylized features of the slope of the term structure of equity returns, its variations over the business cycle, and the negative relationship between cash-flow duration and expected returns in the cross-section of book-to-market-sorted portfolios. Received May 27, 2017; editorial decision October 12, 2017 by Editor Itay Goldstein.

Suggested Citation

  • Hengjie Ai & Mariano Max Croce & Anthony M Diercks & Kai Li, 2018. "News Shocks and the Production-Based Term Structure of Equity Returns," The Review of Financial Studies, Society for Financial Studies, vol. 31(7), pages 2423-2467.
    • Handle: RePEc:oup:rfinst:v:31:y:2018:i:7:p:2423-2467.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhy015
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    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • G1 - Financial Economics - - General Financial Markets

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