IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/16972.html
   My bibliography  Save this paper

Discount Rates

Author

Listed:
  • John H. Cochrane

Abstract

Discount rate variation is the central organizing question of current asset pricing research. I survey facts, theories and applications. We thought returns were uncorrelated over time, so variation in price-dividend ratios was due to variation in expected cashflows. Now it seems all price-dividend variation corresponds to discount-rate variation. We thought that the cross-section of expected returns came from the CAPM. Now we have a zoo of new factors. I categorize discount-rate theories based on central ingredients and data sources. Discount-rate variation continues to change finance applications, including portfolio theory, accounting, cost of capital, capital structure, compensation, and macroeconomics.

Suggested Citation

  • John H. Cochrane, 2011. "Discount Rates," NBER Working Papers 16972, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:16972
    Note: AP EFG
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w16972.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Ivo Welch & Amit Goyal, 2008. "A Comprehensive Look at The Empirical Performance of Equity Premium Prediction," Review of Financial Studies, Society for Financial Studies, vol. 21(4), pages 1455-1508, July.
    2. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    3. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
    4. Zhiguo He & Arvind Krishnamurthy, 2013. "Intermediary Asset Pricing," American Economic Review, American Economic Association, vol. 103(2), pages 732-770, April.
    5. Matthias Fleckenstein & Francis A. Longstaff & Hanno Lustig, 2010. "Why Does the Treasury Issue Tips? The Tips-Treasury Bond Puzzle," NBER Working Papers 16358, National Bureau of Economic Research, Inc.
    6. Pierre-Olivier Gourinchas & Hélène Rey, 2007. "International Financial Adjustment," Journal of Political Economy, University of Chicago Press, vol. 115(4), pages 665-703, August.
    7. Denis Gromb & Dimitri Vayanos, 2010. "Limits of Arbitrage: The State of the Theory," NBER Working Papers 15821, National Bureau of Economic Research, Inc.
    8. Piazzesi, Monika & Swanson, Eric T., 2008. "Futures prices as risk-adjusted forecasts of monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 677-691, May.
    9. Markus K. Brunnermeier, 2008. "Deciphering the Liquidity and Credit Crunch 2007-08," NBER Working Papers 14612, National Bureau of Economic Research, Inc.
    10. Ang, Andrew & Chen, Joseph, 2007. "CAPM over the long run: 1926-2001," Journal of Empirical Finance, Elsevier, vol. 14(1), pages 1-40, January.
    11. Lettau, Martin & Wachter, Jessica A., 2011. "The term structures of equity and interest rates," Journal of Financial Economics, Elsevier, vol. 101(1), pages 90-113, July.
    12. Darrell Duffie & Bruno Strulovici, 2012. "Capital Mobility and Asset Pricing," Econometrica, Econometric Society, vol. 80(6), pages 2469-2509, November.
    13. Chen, Long & Petkova, Ralitsa & Zhang, Lu, 2008. "The expected value premium," Journal of Financial Economics, Elsevier, vol. 87(2), pages 269-280, February.
    14. Lewellen, Jonathan & Nagel, Stefan & Shanken, Jay, 2010. "A skeptical appraisal of asset pricing tests," Journal of Financial Economics, Elsevier, vol. 96(2), pages 175-194, May.
    15. Pastor, Lubos & Stambaugh, Robert F., 2003. "Liquidity Risk and Expected Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 111(3), pages 642-685, June.
    16. JULES H. Van BINSBERGEN & RALPH S. J. KOIJEN, 2010. "Predictive Regressions: A Present‐Value Approach," Journal of Finance, American Finance Association, vol. 65(4), pages 1439-1471, August.
    17. Frazzini, Andrea & Pedersen, Lasse Heje, 2014. "Betting against beta," Journal of Financial Economics, Elsevier, vol. 111(1), pages 1-25.
    18. Grace Xing Hu & Jun Pan & Jiang Wang, 2013. "Noise as Information for Illiquidity," Journal of Finance, American Finance Association, vol. 68(6), pages 2341-2382, December.
    19. Randolph B. Cohen & Christopher Polk & Tuomo Vuolteenaho, 2001. "The Value Spread," NBER Working Papers 8242, National Bureau of Economic Research, Inc.
    20. John Heaton & Deborah Lucas, 2000. "Portfolio Choice and Asset Prices: The Importance of Entrepreneurial Risk," Journal of Finance, American Finance Association, vol. 55(3), pages 1163-1198, June.
    21. Xavier Gabaix & Arvind Krishnamurthy & Olivier Vigneron, 2007. "Limits of Arbitrage: Theory and Evidence from the Mortgage‐Backed Securities Market," Journal of Finance, American Finance Association, vol. 62(2), pages 557-595, April.
    22. Fontana, Alessandro & Scheicher, Martin, 2016. "An analysis of euro area sovereign CDS and their relation with government bonds," Journal of Banking & Finance, Elsevier, vol. 62(C), pages 126-140.
    23. Joao Gomes & Leonid Kogan & Lu Zhang, 2003. "Equilibrium Cross Section of Returns," Journal of Political Economy, University of Chicago Press, vol. 111(4), pages 693-732, August.
    24. Liu, Laura Xiaolei & Zhang, Lu, 2010. "Investment-Based Momentum Profits," Working Paper Series 2010-17, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    25. Ľuboš Pástor, 2000. "Portfolio Selection and Asset Pricing Models," Journal of Finance, American Finance Association, vol. 55(1), pages 179-223, February.
    26. Heaton, John C. & Lucas, Deborah & McDonald, Robert L., 2010. "Is mark-to-market accounting destabilizing? Analysis and implications for policy," Journal of Monetary Economics, Elsevier, vol. 57(1), pages 64-75, January.
    27. Motohiro Yogo, 2006. "A Consumption‐Based Explanation of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 61(2), pages 539-580, April.
    28. Lustig, Hanno & Roussanov, Nikolai & Verdelhan, Adrien, 2014. "Countercyclical currency risk premia," Journal of Financial Economics, Elsevier, vol. 111(3), pages 527-553.
    29. Wachter, Jessica A., 2003. "Risk aversion and allocation to long-term bonds," Journal of Economic Theory, Elsevier, vol. 112(2), pages 325-333, October.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ozdagli, Ali & Velikov, Mihail, 2020. "Show me the money: The monetary policy risk premium," Journal of Financial Economics, Elsevier, vol. 135(2), pages 320-339.
    2. Cochrane, John H., 2005. "Financial Markets and the Real Economy," Foundations and Trends(R) in Finance, now publishers, vol. 1(1), pages 1-101, July.
    3. Victoria Atanasov & Thomas Nitschka, 2013. "The Size Effect in Value and Momentum Factors: Implications for the Cross-section of International Stock Returns," Tinbergen Institute Discussion Papers 13-180/IV/DSF66, Tinbergen Institute.
    4. Guo, Hui & Savickas, Robert & Wang, Zijun & Yang, Jian, 2009. "Is the Value Premium a Proxy for Time-Varying Investment Opportunities? Some Time-Series Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(1), pages 133-154, February.
    5. He, Zhiguo & Kelly, Bryan & Manela, Asaf, 2017. "Intermediary asset pricing: New evidence from many asset classes," Journal of Financial Economics, Elsevier, vol. 126(1), pages 1-35.
    6. Maio, Paulo & Santa-Clara, Pedro, 2012. "Multifactor models and their consistency with the ICAPM," Journal of Financial Economics, Elsevier, vol. 106(3), pages 586-613.
    7. Thiago de Oliveira Souza, 2013. "Discount rates, market frictions and the mystery of the size premium," 2013 Papers pde868, Job Market Papers.
    8. Vayanos, Dimitri & Wang, Jiang, 2013. "Market Liquidity—Theory and Empirical Evidence ," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1289-1361, Elsevier.
    9. Amit Goyal, 2012. "Empirical cross-sectional asset pricing: a survey," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 26(1), pages 3-38, March.
    10. Valentin Haddad & Tyler Muir, 2021. "Do Intermediaries Matter for Aggregate Asset Prices?," Journal of Finance, American Finance Association, vol. 76(6), pages 2719-2761, December.
    11. Keunbae Ahn, 2021. "Predictable Fluctuations in the Cross-Section and Time-Series of Asset Prices," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2021, March.
    12. Jacobs, Heiko, 2015. "What explains the dynamics of 100 anomalies?," Journal of Banking & Finance, Elsevier, vol. 57(C), pages 65-85.
    13. Boguth, Oliver & Simutin, Mikhail, 2018. "Leverage constraints and asset prices: Insights from mutual fund risk taking," Journal of Financial Economics, Elsevier, vol. 127(2), pages 325-341.
    14. Denis Gromb & Dimitri Vayanos, 2018. "The Dynamics of Financially Constrained Arbitrage," Journal of Finance, American Finance Association, vol. 73(4), pages 1713-1750, August.
    15. Stefan Nagel, 2013. "Empirical Cross-Sectional Asset Pricing," Annual Review of Financial Economics, Annual Reviews, vol. 5(1), pages 167-199, November.
    16. Zhiguo He & Arvind Krishnamurthy, 2013. "Intermediary Asset Pricing," American Economic Review, American Economic Association, vol. 103(2), pages 732-770, April.
    17. Koijen, Ralph & Moskowitz, Tobias J & Pedersen, Lasse Heje & Vrugt, Evert B., 2013. "Carry," CEPR Discussion Papers 9771, C.E.P.R. Discussion Papers.
      • Ralph S.J. Koijen & Tobias J. Moskowitz & Lasse Heje Pedersen & Evert B. Vrugt, 2013. "Carry," NBER Working Papers 19325, National Bureau of Economic Research, Inc.
    18. João F. Gomes & Leonid Kogan & Motohiro Yogo, 2009. "Durability of Output and Expected Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 117(5), pages 941-986.
    19. Andrew Detzel, 2017. "Monetary Policy Surprises, Investment Opportunities, And Asset Prices," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 40(3), pages 315-348, September.
    20. Arvind Krishnamurthy, 2010. "Amplification Mechanisms in Liquidity Crises," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(3), pages 1-30, July.

    More about this item

    JEL classification:

    • G0 - Financial Economics - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:16972. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.