A central question in economics is how to discount future cash flows to obtain today's value of an asset. For instance, total wealth is the price of a claim to all future consumption (Lucas 1978). Similarly, the value of the aggregate stock market equals the sum of discounted future dividend payments (Gordon 1962). The major ity of the equity market literature has focused on the dynamics of the value of the aggregate stock market. However, in addition to studying the value of the sum of discounted dividends, exploring the properties of the individual terms in the sum, also called dividend strips, provides us with a lot of information about the way stock prices are formed. Analogous to zero-coupon bonds, which contain information about discount rates at different horizons for fixed income securities, having infor mation on dividend strips informs us about discount rates of risky cash flows at dif ferent horizons. Studying dividend strips can therefore improve our understanding of investors' risk preferences and the endowment or technology process in macro finance models. This paper is the first to empirically measure the prices of dividend strips to study the term structure of the equity premium. Our approach requires only no-arbitrage relations and does not rely on a specific model. We shed new light on the composition of the equity risk premium. The equity premium puzzle, identified by Mehra and Prescott (1985), Hansen and Singleton (1982), and Hansen and Singleton (1983), states that, for plausible values of the risk aversion coefficient, the difference in the expected rate of return on the stock market and the riskless rate of interest is too large, given the observed small variance in the growth rate in per capita consumption. When decomposing the index into dividend strips, a natural question that arises is whether dividends at different horizons contrib ute equally to the equity risk premium or whether either short- or long-term dividends contribute proportionally more than the other. We find that short-term dividends have

/pdf/on-the-timing-and-pricing-of-dividends-uf12chvisu.pdf

On the timing and pricing of dividends

https://www.nber.org/system/files/working_papers/w21234/w21234.pdf

The term structure of returns: Facts and theory ☆

I explore the equilibrium value implications of economic models that incorporate responses to a stochastic environment with growth. I propose dynamic valuation decompositions (DVD’s) designed to distinguish components of an underlying economic model that influence values over long investment horizons from components that impact only the short run. A DVD represents the values of stochastically growing claims to consumption payoffs or cash flows using a stochastic discount process that both discounts the future and adjusts for risk. It is enabled by constructing operators indexed by the elapsed time between the trading date and the date of the future realization of the payoff. Thus formulated, methods from applied mathematics permit me to characterize valuation behavior and the term structure of risk prices in a revealing manner. I apply this approach to investigate how investor beliefs and the associated uncertainty are reflected in current-period values and risk-price elasticities.

/pdf/dynamic-valuation-decomposition-within-stochastic-economies-1umijn098r.pdf

Dynamic Valuation Decomposition Within Stochastic Economies

Standard representative-agent models have di¢culty in accounting for the weak correlation between stock returns and measurable fundamentals, such as consumption and output growth. This failing underlies virtually all modern asset-pricing puzzles. The correlation puzzle arises because these models load all uncertainty onto the supply side of the economy. We propose a simple theory of asset pricing in which demand shocks play a central role. These shocks give rise to valuation risk that allows the model to account for key asset pricing moments, such as the equity premium, the bond term premium, and the weak correlation between stock returns and fundamentals.

/pdf/valuation-risk-and-asset-pricing-41rl9up35g.pdf

Valuation Risk and Asset Pricing

Asset pricing theory has long recognized that financial markets compensate investors who are exposed to some components of uncertainty. This is where macroeconomics comes into play. The economywide shocks, the primary concern of macroeconomists, by their nature are not diversifiable. Exposures to these shocks cannot be averaged out with exposures to other shocks. Thus returns on assets that depend on these macroeconomic shocks reflect “risk” premia and are a linchpin connecting macroeconomic uncertainty to financial markets. A risk premium reflects both the price of risk and the degree of exposure to risk. I will be particularly interested in how the exposures to macroeconomic impulses are priced by decentralized security markets.

https://www.jstor.org/stable/10.1086/678456

Nobel Lecture: Uncertainty Outside and Inside Economic Models

We present a novel approach to depicting asset pricing dynamics by characterizing shock exposures and prices for alternative investment horizons. We quantify the shock exposures in terms of elasticities that measure the impact of a current shock on future cash-flow growth. The elasticities are designed to accommodate nonlinearities in the stochastic evolution modeled as a Markov process. Stochastic growth in the underlying macroeconomy and stochastic discounting in the representation of asset values are central ingredients in our investigation. We provide elasticity calculations in a series of examples featuring consumption externalities, recursive utility, and jump risk.

Risk-price dynamics

We present a novel approach to depicting asset pricing dynamics by characterizing shock exposures and prices for alternative investment horizons. We quantify the shock exposures in terms of elasticities that measure the impact of a current shock on future cash-flow growth. The elasticities are designed to accommodate nonlinearities in the stochastic evolution modeled as a Markov process. Stochastic growth in the underlying macro-economy and stochastic discounting in the representation of asset values are central ingredients in our investigation. We provide elasticity calculations in a series of examples featuring consumption externalities, recursive utility, and jump risk.

https://papers.ssrn.com/sol3/Delivery.cfm?abstractid=1506317

Risk Price Dynamics

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Risk-price dynamics

Risk Price Dynamics

Risk Price Dynamics