Uncertainty Trends
Subject
Finance, Finance
Publishing details
Social Sciences Research Network
Publication Year
2018
Abstract
Even after being orthogonalized with respect to the dividend-price ratio, the volatility of total factor productivity (TFP volatility) is shown to have similar long-run predictive ability for excess market returns as the dividend-price ratio itself. When seen through an asset pricing lens, this finding implies that TFP volatility should also predict real cash flows and/or real interest rates: it is found to mainly predict real cash flows through inflation rates. A model with endogenous growth, Epstein-Zin preferences and nominal price rigidities is shown to reconcile both uncertainty-driven long-run predictability and its real implications. Relying on the model, we justify why alternative notions of uncertainty (like market variance or economic policy uncertainty) have the same predictive ability as TFP volatility provided their priced low-frequency signal is extracted.
Keywords
uncertainty trends; valuation ratios; endogenous growth; price rigidities; financial uncertainty
Series
Social Sciences Research Network
Available on ECCH
No
