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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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International Endogenous Growth, Macro Anomalies, and Asset Prices
Patrick Grüning,Patrick Grüning +1 more
TL;DR: In this paper, the authors studied a two-country production economy with complete and frictionless financial markets and international trade in which competition in RD (i) net exports are negatively correlated with output; ii) the model matched the high co-movement of stock returns across countries.
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Predictability in Consumption Growth and Equity Returns: A Bayesian Investigation
George Theocharides,Alex Paseka +1 more
TL;DR: In this article, the authors estimate a widely cited consumption-based asset pricing model using fully Bayesian MCMC method, which is generally consistent with consumption and dividend growth moments in annual data, the conditional mean of consumption growth (a latent process) is not persistent enough to satisfy the model's restriction that the price/dividend ratio be an affine function of the latent process.
Journal ArticleDOI
Time-varying ambiguity, credit spreads, and the levered equity premium
TL;DR: In this article, the effects of time-varying Knightian uncertainty (ambiguity) on asset pricing in a Lucas exchange economy is studied. But the authors consider a general equilibrium model where an ambiguity-averse agent applies a discount rate that is adjusted not only for the current magnitude of ambiguity but also for the risk associated with its future fluctuations.
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Dynamic asset allocation and consumption under inflation inequality: The impacts of inflation experiences and expectations
TL;DR: In this article, an asset allocation model is proposed to explain how inflation experiences affect household investment and consumption through corresponding inflation expectations, which are characterized by long-term expected inflation, the impact coefficient of the expected inflation and the correlation between expected inflation with the risky return.
ReportDOI
An Empirical Analysis of the Swaption Cube
TL;DR: In this paper, the authors use a comprehensive database of interdealer quotes to conduct the first empirical analysis of the dynamics of the swaption cube using a model independent approach, and establish a set of stylized facts regarding the cross-sectional and time-series variation of conditional volatility and skewness of the swap rate distributions implied by the swap cube.
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.
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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