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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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Model Uncertainty and Term Structure Anomalies
Ting Wu,Xiaoneng Zhu +1 more
TL;DR: In this paper, an equilibrium term structure model that is robust to economic agent's uncertainty about the true data generating process is proposed, which can largely match the mean interest rates and the volatility of interest rates.
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Revisiting the Forward Premium Anomaly Using Consumption Habits: A New Keynesian Model
Bianca De Paoli,Jens Sondergaard +1 more
TL;DR: The authors revisited the ability of consumption habits to resolve the forward premium anomaly as documented in the literature and showed that the favorable results obtained in an endowment setting crucially depend on having persistent dynamics in excess consumption, and do not appear to hold up in a production economy with nominal rigidities.
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Currency returns and downside risk: Debt, volatility, and the gap from benchmark values
TL;DR: In this article, the authors consider portfolio-balance specifications of currency returns, including one based on expected utility theory and another based on prospect theory, using survey data on exchange rate expectations to test directly the models' predictions concerning ex ante excess returns.
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Present Bias, Asset Allocation and the Yield Curve
TL;DR: In this paper, a present-biased general equilibrium model was proposed to explain many features of bond behavior, such as short-term and long-term hedge demands, and explained the bond premium puzzle.
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Yield Curve Momentum
TL;DR: In this article, the authors analyzed time series momentum along the Treasury term structure and found that the momentum factor is unspanned by the information in the term structure today and is hence inconsistent with standard term structure, macro-finance and behavioural models, including models designed to explain momentum.
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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