NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

How to Discount Cashflows with Time-Varying Expected Returns

Andrew Ang, Jun Liu

NBER Working Paper No. 10042
Issued in October 2003
NBER Program(s):   AP

While many studies document that the market risk premium is predictable and that betas are not constant, the dividend discount model ignores time-varying risk premiums and betas. We develop a model to consistently value cashflows with changing risk-free rates, predictable risk premiums and conditional betas in the context of a conditional CAPM. Practical valuation is accomplished with an analytic term structure of discount rates, with different discount rates applied to expected cashflows at different horizons. Using constant discount rates can produce large mis-valuations, which, in portfolio data, are mostly driven at short horizons by market risk premiums and at long horizons by time-variation in risk-free rates and factor loadings.

download in pdf format
   (357 K)

email paper

This paper is available as PDF (357 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w10042

Published: Ang, Andrew and Jan Liu. "How To Discount Cashflows With Time-Varying Expected Returns," Journal of Finance, 2004, v59(6,Dec), 2745-2783.

Users who downloaded this paper also downloaded these:
Cho and Engle w7330 Time-Varying Betas and Asymmetric Effect of News: Empirical Analysis of Blue Chip Stocks
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us