TY  - JOUR
AU  - Ang,Andrew
AU  - Liu,Jun
TI  - How to Discount Cashflows with Time-Varying Expected Returns
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10042
PY  - 2003
Y2  - October 2003
UR  - http://www.nber.org/papers/w10042
L1  - http://www.nber.org/papers/w10042.pdf
N1  - Author contact info:
Andrew Ang
Columbia Business School
3022 Broadway 413 Uris
New York, NY 10027
Tel: 212/854-9154
Fax: 212/662-8474
E-Mail: aa610@columbia.edu

Jun Liu
Rady School of Management
UCSD
Pepper Canyon Hall Room 320
9500 Gilman Dr MC 0093
La Jolla CA 92093
Tel: 310/825-4083
E-Mail: junliu@ucsd.edu
AB  - 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.
ER  -