This paper argues that changing discount rates, rather than changing cash flow expectations, have become the central organizing idea in asset pricing. It surveys return predictability across markets, the expanding factor zoo, and why valuation ratios may say more about future returns than fundamentals.
Presidential Address: Discount Rates
John Cochrane
Research
58 Pages
Key Takeaways
Valuations Predict Returns: From 1947 to 2009, a 1 point higher dividend yield forecast nearly 4 points more return, despite a one year R² of 9%.
Common Factors Matter: In bond markets, a single common factor explains 99.9% of the variance in expected returns across maturities.
Value Challenges CAPM: Across 10 book to market portfolios from 1963 to 2010, average returns rise from growth to value while market betas remain broadly similar.
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