https://macropaperwarehouse.com/authors/ming-zeng/Ming ZengHugo -- gohugo.ioen-ushttps://macropaperwarehouse.com/papers/expectation-driven-term-structure-of-equity-and-bond-yields/https://macropaperwarehouse.com/papers/expectation-driven-term-structure-of-equity-and-bond-yields/<p><strong>Research Question.</strong> What drives the joint historical dynamics of the term structure of equity yields and nominal bond yields — and can a single unified equilibrium model explain the procyclical equity yield slope, the switch in bond-stock correlation from positive to negative after the late 1990s, the maturity-declining predictability of dividend strip returns, and standard aggregate stock market puzzles?</p> <p><strong>Key Departure from Prior Literature.</strong> Existing equilibrium models (habit formation, long-run risk, disaster risk) rely on time-varying risk premia to explain asset prices. Recent survey evidence challenges this: De La O and Myers (2021) show that most aggregate stock price movements are driven by cash-flow growth expectations rather than return expectations, and Van Binsbergen et al. (2013) show that equity yields are driven mainly by dividend growth expectations. This paper constructs an equilibrium model in which equity (bond) yield variation is attributable to subjective dividend growth (GDP growth) expectations, with a constant subjective risk premium implied by CRRA utility.</p>