TY  - JOUR
AU  - Longstaff,Francis
AU  - Piazzesi,Monika
TI  - Corporate Earnings and the Equity Premium
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10054
PY  - 2003
Y2  - October 2003
UR  - http://www.nber.org/papers/w10054
L1  - http://www.nber.org/papers/w10054.pdf
N1  - Author contact info:
Francis Longstaff
UCLA
Anderson Graduate School of Management
110 Westwood Plaza, Box 951481
Los Angeles, CA  90095-1481
Tel: 310/825-2218
Fax: 310/206-5455
E-Mail: francis.longstaff@anderson.ucla.edu

Monika Piazzesi
Department of Economics
Stanford University
579 Serra Mall
Stanford, CA 94305-6072
Tel: (650) 723-9289
E-Mail: piazzesi@stanford.edu
AB  - 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.
ER  -