NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Corporate Earnings and the Equity Premium

Francis Longstaff, Monika Piazzesi

NBER Working Paper No. 10054
Issued in October 2003
NBER Program(s):   AP

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.

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Document Object Identifier (DOI): 10.3386/w10054

Published: Longstaff, Francis A. and Monika Piazzesi. "Corporate Earnings And The Equity Premium," Journal of Financial Economics, 2004, v74(3,Dec), 401-421. citation courtesy of

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