Good Times and the Dividend Yield
A no arbitrage model gives closed form answers to three asset pricing puzzles. Price dividend ratios stay mildly procyclical because the risk premium and dividend yield bend upward with a persistent price of risk state x. Persistence magnifies these effects. Excess volatility appears when state dependent prices of risk for permanent and transitory shocks align. The non affine diffusion tractable and yields $$S = y e^{Ax}$$ and $$Y/S = B + C x^2.$$ Lacks calibration.
What it examines
We build a closed-form, continuous-time no‑arbitrage model with an endogenous dividend yield. Dividends load on a permanent growth state and a persistent, transitory price‑of‑risk state. The model delivers quadratic risk premia and yields to study state-dependent procyclicality, persistence effects on valuation, and permanent vs transitory shock impacts.
What it concludes
The model shows dividend yield and total risk premium are convex in the price‑of‑risk state, producing weak procyclicality in good times, stronger persistence-driven nonlinearities, and amplified return volatility versus dividend growth. Applications include equity valuation, risk‑premium forecasting and calibration. Limitations: stylized diffusion states; future work: richer cash-flow dynamics and estimation.
Evidence objects
Paper cracks asset-pricing puzzles with continuous-time model: dividend yield quadratic, strictly convex in $x$; $y$ tracks permanent growth; risk premia bend upward, making discount rates countercyclical, muting procyclicality in expansions.
key_findings bullet 1 · key_findings · validation V0
Persistence: slower reversion $k$ raises exposure to $x$, amplifying valuations. Excess volatility occurs when prices of risk for permanent and transitory shocks align, letting shocks magnify returns beyond dividend growth.
key_findings bullet 2 · key_findings · validation V0
Methodologically, it solves a non-affine diffusion with inverse-gamma stationary state and endogenous payout, deriving closed-form $A,B,C$ with $S=y\exp(Ax)$ and $Y/S=B+Cx^2$. Strengths: tractability, intuition, transparency; limits: no calibration, parametric restrictions, theory-heavy.
key_findings bullet 3 · key_findings · validation V0
Proposes a closed-form, non-affine asset-pricing model where an endogenous quadratic dividend yield $d/p$ arises from a persistent price-of-risk state, generating convex, state-dependent risk premia. Offers analytical clarity versus Campbell--Cochrane and Bansal--Yaron by deriving explicit quadratic structure and persistence-amplified nonlinearities. Compelling theoretically, yet empirically unvalidated and peripheral to computational/ML agendas today.
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Raw abstract and provenance
Catholic University of Milan - Department of Mathematics, Quantitative Finance, and Econometrics; Bocconi University - CAREFIN - Centre for Applied Research in
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