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A Long-Run Risks Explanation of Predictability Puzzles in Bond and Currency Markets
Ravi Bansal,Ivan Shaliastovich +1 more
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TLDR
In this article, the authors develop and estimate a long-run risks model with time-varying volatilities of expected growth and inflation, which simultaneously accounts for bond return predictability and violations of uncovered interest parity in currency markets.Abstract:
We show that bond risk-premia rise with uncertainty about expected inflation and fall with uncertainty about expected growth; the magnitude of return predictability using these two uncertainty measures is similar to that by multiple yields. Motivated by this evidence, we develop and estimate a long-run risks model with time-varying volatilities of expected growth and inflation. The model simultaneously accounts for bond return predictability and violations of uncovered interest parity in currency markets. We find that preference for early resolution of uncertainty, time-varying volatilities, and non-neutral effects of inflation on growth are important to account for these aspects of asset markets.read more
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Foreign Currency Returns and Systematic Risks
TL;DR: The authors applied an empirical approximation of the intertemporal capital asset pricing model to show that cross-sectional dispersion in currency returns can be rationalized by differences in currency excess returns' sensitivities to the market return's cash-flow news component.
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Was there a "Greenspan conundrum" in the Euro area ?
TL;DR: In this article, an affine term structure model that accommodates unspanned macro risks for the Euro area was proposed, which is distinct from yield-curve risks, using a Near-Cointegrated VAR-like approach to obtain a better estimation of the historical dynamics of the pricing factors.
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Higher-Order Effects in Asset-Pricing Models with Long-Run Risks
TL;DR: In this paper, the authors present a projection-based algorithm for solving the higher-order dynamics of key financial quantities in asset-pricing models with recursive preferences and demonstrate that the method outperforms common methods like discretization and log-linearization in terms of efficiency and accuracy.
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Economic Uncertainty and Interest Rates
TL;DR: In this paper, a robust relation between the interest rate and macroeconomic uncertainty (i.e., conditional variance) was found, consistent with precautionary savings, with high uncertainty associated with low interest rate using numerous data sources, time-periods, and measures.
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General equilibrium pricing of currency and currency options
TL;DR: In this paper, a consumption-based general equilibrium model for valuing foreign exchange contingent claims is presented, which identifies a novel economic mechanism by exploiting highly but imperfectly shared consumption disaster with variable intensities which are the concerns to the representative investor under recursive utility.
References
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THE EQUITY PREMIUM A Puzzle
Rajnish Mehra,Edward C. Prescott +1 more
TL;DR: This paper showed that an equilibrium model which is not an Arrow-Debreu economy will be the one that simultaneously rationalizes both historically observed large average equity return and the small average risk-free return.
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Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework
Larry G. Epstein,Stanley E. Zin +1 more
TL;DR: In this paper, a class of recursive, but not necessarily expected utility, preferences over intertemporal consumption lotteries is developed, which allows risk attitudes to be disentangled from the degree of inter-temporal substitutability, leading to a model of asset returns in which appropriate versions of both the atemporal CAPM and the inter-time consumption-CAPM are nested as special cases.
Posted Content
By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior
TL;DR: In this paper, a consumption-based model is proposed to explain a wide variety of dynamic asset pricing phenomena, including the procyclical variation of stock prices, the long-term horizon predictability of excess stock returns, and the countercyclical variations of stock market volatility.
Posted Content
Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles
Ravi Bansal,Amir Yaron +1 more
TL;DR: In this article, the authors show that news about growth rates significantly alter agent's perceptions regarding long run expected growth rates and growth rate uncertainty, which leads to a large equity risk premium, low risk free interest rate, and large market volatility.
Journal ArticleDOI
Forward and spot exchange rates
TL;DR: In this paper, the authors find that most of the variation in forward rates is variation in premium, and the premium and expected future spot rate components of forward rates are negatively correlated, and they conclude that the forward market is not efficient or rational.
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Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles
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Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework
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