Time Variation in Cash Flows and Discount Rates
Finance Seminar by Denada Ibrushi (HEC Montréal, HEC Liège) - N1 - 1701
April 2018, Monday 16 (11:00 am )
The relative contributions of cash flow and discount rate news to the conditional variance of market returns exhibit significant variation over time. We identify lagged changes in PPI inflation as the main macroeconomic determinant of this time variation. We analyze the economic importance of these results by allowing for time variation in cash flow and discount rate betas in Campbell and Vuolteenaho (2004) asset pricing framework. A conditional version of their twobeta framework not only provides reasonable estimates of risk prices and relative risk aversion coefficients but also outperforms other models in accounting for the cross-sectional variation in expected returns.
Keywords: Multivariate Conditional Variance Models, Dynamic Conditional Correlation, Return Decomposition, PPI Inflation, Two-Beta Model