Equilibrium Predictability, Term Structure of Equity Premia, and Other Return Characteristics

This article presents a structural model of aggregate return characteristics based on a one-channel Bansal and Yaron (2004) economy under recursive preferences. The results rest on an endogenously determined price-dividend ratio that is not exponentially affine, which implies time-variation and predictability of equity premia. The predictability coefficient itself is stochastic. This provides theoretical foundations for recent works in predictability like Dangl and Halling (2011). In longer horizons, the predictability relationship is highly volatile making it difficult to make inferences about long-horizon predictability.