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: Firms' payout decisions respond to expected returns: everything else equal, firms invest less and pay out more when their cost of capital increases. Given investors' demand for firm payout, market clearing implies that productivity and payout demand dynamics fully determine equilibrium asset prices and returns. Using this logic, we propose a payout-based asset pricing framework. To operationalize it, we introduce a quantitative model, calibrating the productivity and payout demand processes to match aggregate U.S. corporate output and payout moments. Model-implied payout yields and firm returns match key empirical moments, and model-implied expected returns predict future firm returns in the data.
Discussant: Lukas Schmid, University of Southern California
