We show that investors price immediate, short-term stock market outcomes very different from outcomes that occur further into the future. To this end, we introduce the forward pricing kernel to decompose long-term pricing kernels into short-term and forward pricing kernels. Using index options, we find that kernels with maturities up to twelve months are U-shaped, and show that this results from the shape of the one-month pricing kernel. Once we remove the impact of the one-month kernel, we show that forward kernels are in line with standard long-run risk models in terms of their shape, level and time-series variation.

Equity duration is a measure of discount-rate sensitivity that is driven by both, stock-specific cash-flow timing and stock-specific discount-rate levels. Established measures of equity duration using market-price information derive their predictive power for returns from using market-implied discount rates. We introduce new measures of pure cash-flow timing which disentangle discount-rate level from cash-flow timing information. Our results indicate an unconditionally flat relationship between timing and average returns. However, it turns out that in recessions (expansion episodes), there is a negative (positive) relation between cash-flow timing and average stock returns.

We study U.S. house price movements using a variance decomposition based on subjective expectations data from the University of Michigan’s Survey of Consumers. Contrary to previous VAR-based models for rational expectations, we find that households’ subjective cash flow (income) expectations account for the dominant share of the overall variation in house prices, whereas subjective discount rate (return) expectations are insignificant. We also show that households’ ex post forecast errors and ex ante belief distortions, defined as the difference between subjective and rational expectations, are persistent and associated with housing data, macroeconomic views of households, and credit conditions.