Price Dividend Ratio Factors: Proxies for Long Run Risk, Review of Asset Pricing Studies
We show that several asset pricing models that rely on long-run risks imply that the state of the economy can be captured by factors derived from the price-dividend ratios of stock portfolios. We find two factors with small growth and large value tilts are important for this purpose, thereby relating the Fama-French model and the Bansal-Yaron and Merton intertemporal asset pricing models. As predicted by the model, these price-dividend ratio factors track consumption volatility and predict future consumption and stock dividends, and the covariance of returns with their innovations explains the cross-section of average returns of several stock portfolios.
Ravi Jagannathan, Srikant Marakani
Jagannathan, Ravi, and Srikant Marakani. 2015. Price Dividend Ratio Factors: Proxies for Long Run Risk. Review of Asset Pricing Studies. 5(1)