Many academics' papers are described as 'landmark'; this one has a better claim to the label than most
, a professor at the University of Chicago’s Booth School of Business, gave a presidential address on “Discount Rates” to the American Finance Association. It was published as a paper a few months later. In a sweeping take, Mr Cochrane set out how academics’ understanding of the way asset prices are determined has shifted over the past half-century. Many papers are described as “landmark”; this one has a better claim to the label than most.
There are practical implications. A generation ago an investor might have looked to history for a guide to expected returns. Now yields are seen as a more useful steer. This is clearer with government bonds. The real annual return on American Treasury bonds was 1.9% between 1900 and 2018, according to Credit Suisse’s Global Investment Returns Yearbook. But history is bunk. It would not be wise to expect a 1.
A lot of people prefer the earnings yield. Share buy-backs have become a more popular way to return capital to stockholders than paying dividends. The earnings yield may be a better guide to expected returns. True, not all company earnings are distributed to shareholders in dividends or buy-backs; some are used to pay for investment to generate future earnings growth. On the other hand, that growth should also be considered part of expected returns.
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