Price Dividend Ratio Factors : Proxies for Long Run Risk

Ravi Jagannathan, Srikant Marakani

NBER Working Paper No. 17484
Issued in October 2011, Revised in August 2013
NBER Program(s):Asset Pricing Program

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 than the stock index price dividend ratio and the corporate yield spread, and has information in addition to what is in the slope of the term structure of interest rates, in forecasting the growth rate in real time consumption and stock index dividends. The covariance of excess returns with factor innovations explain the cross section of excess returns on size, book/market, earnings/price ratio, long term reversal, and short term reversal sorted portfolios in a manner robust to look-ahead and useless factor biases. Our findings suggest that the widely used Fama and French (1993) three factor model and the long run risk models studied in the literature are not necessarily inconsistent with each other. They may be representing the same underlying phenomenon, but emphasizing different aspects of reality.

download in pdf format
   (647 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w17484

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. citation courtesy of

Users who downloaded this paper also downloaded* these:
Wei Foreign Direct Investment in China: Sources and Consequences
Alexander, Chen, Seppi, and Spatt w15143 The Role of Advisory Services in Proxy Voting
Jackson w18624 Non-Cognitive Ability, Test Scores, and Teacher Quality: Evidence from 9th Grade Teachers in North Carolina
Campbell and Shiller w2100 The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors
van Binsbergen, Hueskes, Koijen, and Vrugt w17416 Equity Yields
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us