Inferring Aggregate Market Expectations from the Cross Section of Stock Prices

Research output: Contribution to journalArticlepeer-review


We introduce a new approach to estimating long-term aggregate discount rates using the cross section of earnings and book values to explain current stock prices and extract expected market returns. The proposed discount rate measure is countercyclical. Shocks to it account for nearly half of historical market return variation; in contrast, shocks to other discount rate measures account for no more than 2%. It dominates other measures in explaining time-series variation in returns on duration-sorted portfolios and delivers out-of-sample predictability that exceeds that afforded by other expected return measures and predictive variables. It also performs well in international equity markets.

Original languageEnglish (US)
Pages (from-to)1064-1099
Number of pages36
JournalJournal of Financial and Quantitative Analysis
Issue number3
StatePublished - May 11 2024

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics


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