Journal Article

Corporate Fraction and the Equilibrium Term Structure of Equity Risk

Roberto Marfè

in Review of Finance

Volume 20, issue 2, pages 855-905
Published in print March 2016 | ISSN: 1572-3097
Published online May 2015 | e-ISSN: 1573-692X | DOI: https://dx.doi.org/10.1093/rof/rfv019
Corporate Fraction and the Equilibrium Term Structure of Equity Risk

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  • Mathematical Methods; Programming Methods; Mathematical and Simulation Modelling
  • General Equilibrium and Disequilibrium
  • Financial Markets
  • Economics

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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 article 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 not only 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.

Keywords: C62; D51; D53; G12; G13

Journal Article.  17377 words.  Illustrated.

Subjects: Mathematical Methods; Programming Methods; Mathematical and Simulation Modelling ; General Equilibrium and Disequilibrium ; Financial Markets ; Economics

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