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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
Citations
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Un)expected Monetary Policy Shocks and Term Premia
TL;DR: The authors provided a quantitative structural model with endogenous, time-varying term premia that are consistent with empirical findings and provided a plausible explanation for partly contradictory estimates in the empirical literature.
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Real Exchange Rates and Currency Risk Premiums
TL;DR: Uppal et al. as mentioned in this paper showed that the real exchange rate strongly and negatively predicts future excess currency returns, and attributed most of the variability in real exchange rates to changes in currency risk premiums.
Journal ArticleDOI
Real Exchange Rates and Currency Risk Premia
TL;DR: In this paper, the authors exploit the link between deviations from uncovered interest rate parity (UIP), long-run relative purchasing power parity (PPP), and deviations from real rate equality, to develop more powerful tests of the predictive power of real exchange rates for excess currency returns.
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Global Equity Correlation in FX Carry and Momentum Trades
Joon Woo Bae,Redouane Elkamhi +1 more
TL;DR: In this article, a risk-based explanation for the excess returns of two widely-known currency speculation strategies, carry and momentum trades, was provided, and a global equity correlation factor was constructed to explain the variation in average excess returns.
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Monetary Policy Uncertainty and Bond Risk Premium
Fuwei Jiang,Guoshi Tong +1 more
TL;DR: In this article, the authors used the news based MPU measure in Baker, Bloom, and Davis (2016) to capture monetary policy uncertainty, and found that MPU forecasts significantly and positively future monthly Treasury bond excess returns.
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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