The Equity Term Structure in Equilibrium Model

I extend the long-run risk (LRR) model by applying non-Gaussian time-varying distributed shocks to the consumption and dividend growth process. This trackable LRR-based asset pricing model not only explains a large number of realistic non-Gaussian features of consumption growth and asset price moments (i.e. excess return, variance risk premium) but also explains the time variation of the equity term structure. Specifically, the model endogenously generates upward-sloping forward equity yield, pro-cyclical forward equity yield spread, counter-cyclical one-period equity return, and pro-cyclical expected yield change. My paper sheds light on explaining equity term structure by using non-Gaussian shocks