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Sizing Up the Fed's Maturity Extension Program
The Federal Open Market Committee (FOMC) recently announced its intention to extend the average maturity of its holdings of securities by purchasing $400 billion of Treasury securities with remaining maturities of six years to thirty years and selling an equal amount of Treasury securities with remaining maturities of three years or less. The nominal size of this maturity extension program, at $400 billion, is smaller than the $600 billion of purchases during the second round of large-scale asset purchases (LSAP 2) completed in June 2011. The two programs are more comparable in size, however, ...
A Stock Return Decomposition Using Observables
We propose a method to decompose stock returns period by period. First, we argue that one can directly estimate expected stock returns from securities available in modern financial markets (using the real yield curve and the Martin (2017) equity risk premium). Second, we derive a return decomposition which is based on stock price elasticities with respect to expected returns and expected dividends. We calculate elasticities from dividend futures. Our decomposition is an alternative to the Campbell-Shiller log-linearization which relies on an assumption about the log-linearization constant. An ...