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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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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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Monetary Policy and Treasury Risk Premia
TL;DR: In this article, the role of monetary policy as a source of time-varying priced risk in bond markets was investigated and it was shown that path shocks account for between 10% and 15% of the variance of one-year expected excess returns on bonds with maturities 2-5 years and are also priced in the cross-section of equity returns.
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Global Risk Aversion and International Return Comovements
TL;DR: In this article, the authors established three stylized facts about global equity and bond return comovements: equity return correlations are higher, asymmetric, and countercyclical, whereas bond return correlation are lower, symmetric and weakly procyclical; they found that different sensitivities of equity returns (strongly negative) and bond returns (weakly positive or negative) to the global risk aversion shock can explain the observed comovement differences.
ReportDOI
Gravity in FX R-Squared: Understanding the Factor Structure in Exchange Rates
TL;DR: In this article, the risk characteristics of currencies were compared to measures of physical, cultural, and institutional distance, and it was shown that currencies of countries which are more distant from other countries are more exposed to systematic currency risk.
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Implications of Incomplete Markets for International Economies
TL;DR: In this article, the authors develop a restriction that precludes implausibly high reward-for-risk in incomplete inter-national economies to consider a theoretical problem that characterizes a lower bound on the covariance between stochastic discount factors (SDFs) subject to correct pricing.
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Expected Business Conditions and Bond Risk Premia
TL;DR: In this paper, the authors study the predictability of bond risk premia by means of expectations to future business conditions using survey forecasts from the Survey of Professional Forecasters and show that expected business conditions consistently affect excess bond returns and that the inclusion of expected business condition in standard predictive regressions improves forecast performance relative to models using information derived from the current term structure or macroeconomic variables.
References
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Journal ArticleDOI
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.
Journal ArticleDOI
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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