TY  - JOUR
AU  - Lettau,Martin
AU  - Wachter,Jessica A.
TI  - The Term Structures of Equity and Interest Rates
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14698
PY  - 2009
Y2  - January 2009
UR  - http://www.nber.org/papers/w14698
L1  - http://www.nber.org/papers/w14698.pdf
N1  - Author contact info:
Martin Lettau
Haas School of Business
University of California, Berkeley
545 Student Services Bldg. #1900
Berkeley, CA 94720-1900
Tel: 510/642-6349
Fax: 510/643-1412
E-Mail: lettau@haas.berkeley.edu

Jessica Wachter
Department of Finance
2300 SH-DH
The Wharton School
University of Pennsylvania
3620 Locust Walk
Philadelphia, PA 19104
Tel: 215/898-7634
Fax: 215/898-6200
E-Mail: jwachter@wharton.upenn.edu
AB  - This paper proposes a dynamic risk-based model capable of jointly explaining the term structure of interest rates, returns on the aggregate market and the risk and return characteristics of value and growth stocks. Both the term structure of interest rates and returns on value and growth stocks convey information about how the representative investor values cash flows of different maturities. We model how the representative investor perceives risks of these cash flows by specifying a parsimonious stochastic discount factor for the economy. Shocks to dividend growth, the real interest rate, and expected inflation are priced, but shocks to the price of risk are not. Given reasonable assumptions for dividends and inflation, we show that the model can simultaneously account for the behavior of aggregate stock returns, an upward-sloping yield curve, the failure of the expectations hypothesis and the poor performance of the capital asset pricing model.
ER  -