Department of Economics and Finance
College of Business
City University of Hong Kong
P7422, Academic 1
Tat Chee Avenue, Kowloon, Hong Kong
NBER Working Papers and Publications
|October 2011||Price Dividend Ratio Factors : Proxies for Long Run Risk|
with Ravi Jagannathan: w17484
We evaluate the empirical support for a broad class of long run risk models using information in factors extracted through principal component analysis of the covariance matrix of log price dividend ratios of twenty five equity portfolios formed on Size and Book-to-Market. We identify two price-dividend ratio factor proxies for economy wide long run risk, one tracking the volatility of the growth rate in economy wide aggregate consumption, and the other predicting the growth rates in the stock index portfolio dividends and aggregate consumption, consistent with the implications of these models. We show that that the long run risk factor driving expected consumption growth is not recoverable from the cross section of excess returns alone. The price dividend ratio factors perform better th...
Published: R. Jagannathan & S. Marakani, 2015. "Price-Dividend Ratio Factor Proxies for Long-Run Risks," Review of Asset Pricing Studies, vol 5(1), pages 1-47.