Return predictability with endogenous growth

AuthorL. Bretscher, F. M. Bandi, A. Tamoni
JournalJournal of Financial Economics
Date6 nov. 2023
CatégorieAcademic Publications
Volume150(3)
Page numbers103724

The component of the volatility of total factor productivity (TFP) that is orthogonal to the dividend price ratio is shown to have long-run predictive ability for excess market returns. 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. A model with endogenous growth, Epstein-Zin preferences and price rigidities reconciles both TFP volatility-driven long-run predictability and its real implications. Within the model, we justify the similar (to that of TFP volatility) predictive ability of a low-frequency notion of market volatility as well as the cross-sectional pricing of TFP volatility risk in alternative asset classes.