Corporate Earnings and the Equity Premium / Francis Longstaff, Monika Piazzesi.

Format:

Book

Author/Creator:

Longstaff, Francis.

Contributor:

National Bureau of Economic Research.

Piazzesi, Monika.

Series:

Working Paper Series (National Bureau of Economic Research) no. w10054.

NBER working paper series no. w10054

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2003.

Summary:

Corporate cash flows are highly volatile and strongly procyclical. We examine the asset-pricing implications of the sensitivity of corporate cash flows to economic shocks within a continuous-time model in which dividends are a stochastic fraction of aggregate consumption. We provide closed-form solutions for stock values and show that the equity premium can be represented as the sum of three components which we call the consumption-risk, event-risk, and corporate-risk premia. Calibrating to historical data, we show that the model implies a total equity premium many times larger than in the standard model. The model also generates levels of equity volatility consistent with those experienced in the stock market.

Notes:

Print version record

October 2003.