Open AccessPosted Content
A Long-Run Risks Explanation of Predictability Puzzles in Bond and Currency Markets
Ravi Bansal,Ivan Shaliastovich +1 more
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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The Cross-Section of Currency Volatility Premia
TL;DR: In this paper, a zero-cost strategy that buys forward volatility agreements with downward sloping volatility curves and sells those with upward slopes -the volatility carry strategy - earns on average 5.15% per month.
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Exchange rate puzzles: evidence from rigidly fixed nominal exchange rate systems
Charles Engel,Feng Zhu +1 more
TL;DR: The authors examined the behavior of real exchange rates among pairs of economies that have rigidly fixed nominal exchange rates, eg countries within the euro area, regions in China and Canada, and Hong Kong SAR vis-a-vis the United States, compared with that among non-euro-area OECD economies.
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Volatility, Intermediaries, and Exchange Rates
Xiang Fang,Yang Liu +1 more
TL;DR: The authors studied how financial market volatility drives exchange rates through the risk management practice of financial intermediaries and built a model in which the major participants in the international financial market are levered intermediaries subject to value at risk constraints.
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Implications of Return Predictability across Horizons for Asset Pricing Models
TL;DR: In this article, the authors analyze predictors-based variance bounds, i.e. bounds on the variance of the stochastic discount factors (SDFs) that price a given set of returns conditional on the information contained in a vector of return predictors.
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Addicted to Debt: Foreign Purchases of U.S. Treasuries and the Term Premium
TL;DR: In this article, the authors investigated the effect of foreign purchases of U.S. Treasury bonds by foreigners on long-term yields and the term-premium and found that foreign purchases decreased longterm yields significantly over the period prior to the financial crisis.
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.
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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.
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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.
Related Papers (5)
Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles
Ravi Bansal,Amir Yaron +1 more
Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework
Larry G. Epstein,Stanley E. Zin +1 more