scholarly journals Growth-Rate and Uncertainty Shocks in Consumption: Cross-Country Evidence

2017 ◽  
Vol 9 (1) ◽  
pp. 1-39 ◽  
Author(s):  
Emi Nakamura ◽  
Dmitriy Sergeyev ◽  
Jón Steinsson
Keyword(s):  
Growth Rate ◽  
Asset Pricing ◽  
Equity Premium ◽  
Developed Countries ◽  
Parameter Estimates ◽  
Uncertainty Shocks ◽  
Long Run ◽  
Cross Country ◽  
Long Run Risks ◽  
Shock Exposure

We provide new estimates of the importance of growth-rate shocks and uncertainty shocks for developed countries. The shocks we estimate are large and correspond to well-known macroeconomic episodes such as the Great Moderation and the productivity slowdown. We compare our results to earlier estimates of “ long-run risks” and assess the implications for asset pricing. Our estimates yield greater return predictability and a more volatile price-dividend ratio. In addition, we can explain a substantial fraction of cross-country variation in the equity premium. An advantage of our approach, based on macroeconomic data alone, is that the parameter estimates cannot be viewed as backward engineered to fit asset pricing data. We provide intuition for our results using the recently developed framework of shock-exposure and shock-price elasticities. (JEL E21, E32, E44, G12, G35)

scholarly journals How Much Would You Pay to Resolve Long-Run Risk?

2014 ◽  
Vol 104 (9) ◽  
pp. 2680-2697 ◽  
Author(s):  
Larry G. Epstein ◽  
Emmanuel Farhi ◽  
Tomasz Strzalecki
Keyword(s):  
Asset Pricing ◽  
Temporal Resolution ◽  
Recursive Utility ◽  
Elasticity Of Intertemporal Substitution ◽  
Careful Scrutiny ◽  
Long Run ◽  
Quantitative Properties ◽  
Long Run Risks ◽  
Asset Pricing Puzzles ◽  
Long Run Risk

Though risk aversion and the elasticity of intertemporal substitution have been the subjects of careful scrutiny, the long-run risks literature as well as the broader literature using recursive utility to address asset pricing puzzles has ignored the full implications of their parameter specifications. Recursive utility implies that the temporal resolution of risk matters and a quantitative assessment thereof should be part of the calibration process. This paper gives a sense of the magnitudes of implied timing premia. Its objective is to inject temporal resolution of risk into the discussion of the quantitative properties of long-run risks and related models. (JEL D81, G11, G12)

scholarly journals From Which Consumption-Based Asset Pricing Models Can Investors Profit? Evidence from Model-Based Priors

2020 ◽  
Author(s):  
Mathias S Kruttli
Keyword(s):  
Asset Pricing ◽  
Parameter Estimates ◽  
Pricing Models ◽  
Predictive Regression ◽  
Model Based ◽  
Asset Pricing Models ◽  
Long Run ◽  
Regression Parameters ◽  
Economic Constraints ◽  
Long Run Risk

Abstract This article analyzes whether consumption-based asset pricing models improve the excess returns forecasts of a hypothetical investor with access to these models from 1947 onwards. The investor imposes economic constraints derived from asset pricing models as model-based priors on predictive regression parameters through a Bayesian framework. Three models are considered: habit formation, long-run risk, and prospect theory. The model-based priors generally perform better than priors that shrink the parameter estimates to the historical average model and priors that impose a positive equity premium. This analysis helps to assess the value of consumption-based asset pricing models to investors.

scholarly journals A Long-Run Risks Model of Asset Pricing with Fat Tails*

2009 ◽  
Vol 14 (3) ◽  
pp. 409-449 ◽  
Author(s):  
Zhiguang (Gerald) Wang ◽  
Prasad V. Bidarkota
Keyword(s):  
Asset Pricing ◽  
Fat Tails ◽  
Long Run ◽  
Long Run Risks

scholarly journals Consumption-Based Asset Pricing When Consumers Make Mistakes

2021 ◽  
Vol 2021 (015) ◽  
pp. 1-71
Author(s):  
Chris Anderson ◽  
Keyword(s):  
Asset Pricing ◽  
Stock Returns ◽  
Equity Premium ◽  
Expected Returns ◽  
Power Utility ◽  
Expected Return ◽  
Risk Return ◽  
Asset Pricing Models ◽  
Long Run ◽  
Wide Range

I analyze the implications of allowing consumers to make mistakes on the risk-return relationships predicted by consumption-based asset pricing models. I allow for consumption mistakes using a model in which a portfolio manager selects investments on a consumer's behalf. The consumer has an arbitrary consumption policy that could reflect a wide range of mistakes. For power utility, expected returns do not generally depend on exposure to single-period consumption shocks, but robustly depend on exposure to both long-run consumption and expected return shocks. I empirically show that separately accounting for both types of shocks helps explain the equity premium and cross section of stock returns.

scholarly journals Higher Order Effects in Asset Pricing Models with Long‐Run Risks

2018 ◽  
Vol 73 (3) ◽  
pp. 1061-1111 ◽  
Author(s):  
WALTER POHL ◽  
KARL SCHMEDDERS ◽  
OLE WILMS
Keyword(s):  
Asset Pricing ◽  
Higher Order ◽  
Order Effects ◽  
Pricing Models ◽  
Asset Pricing Models ◽  
Long Run ◽  
Long Run Risks ◽  
Higher Order Effects

Explaining Puzzles

2017 ◽  
Author(s):  
Kerry E. Back
Keyword(s):  
Equity Premium ◽  
Labor Income ◽  
Income Risk ◽  
Labor Income Risk ◽  
Catching Up ◽  
Long Run ◽  
Rare Disasters ◽  
Risk Free Rate ◽  
Long Run Risks ◽  
Free Rate

Various models proposed to explain the equity premium or risk‐free rate puzzle are explained: external habits (Abel’s “catching up with the Joneses” model and the Campbell‐Cochrane model), rare disasters, Epstein‐Zin‐Weil utility, long run risks, and idiosyncratic uninsurable labor income risk. External habits allow the SDF to be variable without requiring high variability of consumption. The SDF for a representative investor with Epstein‐Zin‐Weil utility depends on consumption and the market return. It is most useful when the world is not IID, as in the long‐run risks model. With uninsurable labor income risk, there is no representative investor even if investors all have the same CRRA utility, and there is additional exibility to explain asset returns.

Sign in / Sign up

Export Citation Format

Share Document