Christian Julliard, London School of Economics and Political Science
Abstract: We develop a unified framework to study the term structure of risk premia of nontradable factors. Our method delivers level and time variation of risk premia, uncovers their propagation mechanism, and is robust to misspecification and weak identification. Most macroeconomic factors are weakly identified at a quarterly frequency but have increasing (unconditional) term structures with large risk premia at business cycle horizons. Crucially, the whole term structure is delivered by the propagation of the same shocks and is not a mechanical byproduct of factor persistency. Moreover, macro risk premia are strongly time-varying and countercyclical. Our framework also recovers the term structure of forward equity yields. We show that it is strongly countercyclical and closely matches the observed values implied by the dividend strip data.
Discussant: Andrea Tamoni, University of Notre Dame
Damir Filipovic, École Polytechnique Fédérale de Lausanne
Markus Pelger, Stanford University
Ye Ye, Stanford University
Abstract: We propose a new framework to explain the factor structure in the full cross section of Treasury bond returns. Our method unifies non-parametric curve estimation with cross-sectional factor modeling. We identify smoothness as a fundamental principle of the term structure of returns. Our approach implies investable factors, which correspond to the optimal spanning basis functions in decreasing order of smoothness. Our factors explain the slope and curvature shapes frequently encountered in PCA. In a comprehensive empirical study, we show that the first four factors explain the time-series variation and risk premia of the term structure of excess returns. Cash flows are covariances as the exposure of bonds to factors is fully explained by cash flow information. We identify a state-dependent complexity premium. The fourth factor, which captures complex shapes of the term structure premium, substantially reduces pricing errors and pays off during recessions.
Andreas Stathopoulos, University of North Carolina-Chapel Hill
Abstract: We propose a payout-based approach for the evaluation of the asset pricing implications of production models. Our approach recovers the implicit return process of an optimizing firm from its observed payout processes without the need to measure firm investment or specify investor preferences, by answering the following question: given the firm's production and financing technology, what are the equity and debt rates of return that induce the firm to optimally provide the observed equity and debt payouts? We simulate the canonical representative firm model and use our approach to explore whether the model-implied U.S. aggregate returns match the properties of their empirical counterparts. We find that the canonical model gives rise to three important asset pricing puzzles regarding aggregate equity and debt returns, indicating the need for additional features that generate more realistic asset pricing properties.
Discussant: Lukas Schmid, University of Southern California
