A Macro-Finance Term Structure Model for Bond and Dividend Discount Rates

We present an arbitrage-free affine term structure model that jointly prices U.S. Treasury bonds, S&P 500 dividend strips and the S&P 500 equity index as a function of the economy. Our model allows us to extract new insights on how short- and long-duration dividends and their discount rates respond to changes in the economy. Within the affine model, we obtain accurate decompositions of discount rates into risk free rates, inter est rate and dividend risk premiums. Our model is able to price bond and equity claims with high precision and predict economic variables and returns in bonds and short-horizon dividends