Presidential Address: Discount Rates

March 3, 2021 Jeremiah Hendren

Presidential Address: Discount Rates

Cochrane, John H.
The Journal of Finance 66, no. 4 (2011): 1047-1108
http://www.doi.org/10.3386/w16972

Asset prices should equal expected discounted cashflows. Forty years ago, Eugene Fama (1970) argued that the expected part, “testing market efficiency,” provided the framework for organizing asset-pricing research in that era. I argue that the “discounted” part better organizes our research today. I start with facts: how discount rates vary over time and across assets. I turn to theory: why discount rates vary. I attempt a categorization based on central assumptions and links to data, analogous to Fama’s “weak,” “semi-strong,” and “strong” forms of efficiency. Finally, I point to some applications, which I think will be strongly influenced by our new understanding of discount rates. In each case, I have more questions than answers. This paper is more an agenda than a summary.

John H. Cochrane

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