Presidential Address: Discount Rates



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    • University of Chicago Booth School of Business, and NBER. I thank John Campbell, George Constantnides, Doug Diamond, Gene Fama, Zhiguo He, Bryan Kelly, Juhani Linnanmaa, Toby Moskowitz, Lubos Pastor, Monika Piazzesi, Amit Seru, Luis Viceira, Lu Zhang, and Guofu Zhou for very helpful comments. I gratefully acknowledge research support from CRSP and outstanding research assistance from Yoshio Nozawa.


Discount-rate variation is the central organizing question of current asset-pricing research. I survey facts, theories, and applications. Previously, we thought returns were unpredictable, with variation in price-dividend ratios due to variation in expected cashflows. Now it seems all price-dividend variation corresponds to discount-rate variation. We also thought that the cross-section of expected returns came from the CAPM. Now we have a zoo of new factors. I categorize discount-rate theories based on central ingredients and data sources. Incorporating discount-rate variation affects finance applications, including portfolio theory, accounting, cost of capital, capital structure, compensation, and macroeconomics.