Predictable Risks and Predictive Regression in Present-Value Models

Piatti, Ilaria and Trojani, Fabio (2017) Predictable Risks and Predictive Regression in Present-Value Models. Saïd Business School Working Paper 2017-11.

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Abstract

Using a latent variables approach, we estimate the dynamics of dividends and returns in a tractable present-value model with time-varying risks. Expected returns imply a similar return predictability as under homoskedasticity, while expected dividend growth is more persistent and explains a small fraction of future dividends. Stochastically mean reverting dividends and returns are linked to a time-varying predictability, a stochastic decomposition of price-dividend ratio variances and a closed-form decomposition of cash-flow, discount rate and volatility news in an intertemporal CAPM. The estimated model also implies economically plausible time-varying term structures of dividend-return expectations and risks.

Item Type: Oxford Saïd Research Paper
Keywords: Predictability, Present-value models, Predictive regression, Persistence, Term structure of risk, finance
Subject(s): Finance
Date Deposited: 26 Mar 2015 14:28
Last Modified: 03 Aug 2017 09:00
Funders: not applicable
URI: http://eureka.sbs.ox.ac.uk/id/eprint/5267

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