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Corporate Fraction and the Equilibrium Term-Structure of Equity Risk

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  • Roberto Marfè

Abstract

The recent empirical evidence of a downward sloping term structure of equity risk is viewed as a challenge to many leading asset pricing models. This paper analytically characterizes conditions under which a continuous-time long-run risk model can accommodate the stylized facts about dividend and equity risk, when dividends are a stationary stochastic fraction of aggregate consumption. Such a cointegrating relation makes dividends riskier in the short-run than at medium horizons but also preserves the role of long-run risk: consequently, the model captures both the traditional puzzles, like the high equity premium, as well as the new evidence about the term structure of equity risk.

Suggested Citation

  • Roberto Marfè, 2015. "Corporate Fraction and the Equilibrium Term-Structure of Equity Risk," Carlo Alberto Notebooks 409, Collegio Carlo Alberto.
    • Handle: RePEc:cca:wpaper:409
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    Cited by:

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    2. Matthijs Breugem & Stefano Colonello & Roberto Marfè & Francesca Zucchi, 2020. "Dynamic Equity Slope," Working Papers 2020:21, Department of Economics, University of Venice "Ca' Foscari".
    3. Hasler, Michael & Marfè, Roberto, 2016. "Disaster recovery and the term structure of dividend strips," Journal of Financial Economics, Elsevier, vol. 122(1), pages 116-134.
    4. van Binsbergen, Jules H. & Koijen, Ralph S.J., 2017. "The term structure of returns: Facts and theory," Journal of Financial Economics, Elsevier, vol. 124(1), pages 1-21.
    5. Michael Hasler & Mariana Khapko & Roberto Marfè, 2020. "Rational Learning and the Term Structures of Value and Growth Risk Premia," Carlo Alberto Notebooks 622, Collegio Carlo Alberto.
    6. Roberto Marfè, 2017. "Income Insurance and the Equilibrium Term Structure of Equity," Journal of Finance, American Finance Association, vol. 72(5), pages 2073-2130, October.
    7. Hasler, Michael & Khapko, Mariana & Marfè, Roberto, 2019. "Should investors learn about the timing of equity risk?," Journal of Financial Economics, Elsevier, vol. 132(3), pages 182-204.

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    More about this item

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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