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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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Currency Premia in Open Economies
TL;DR: This paper developed a two-country asset pricing model to explain countries' heterogeneous exposure to global risks and how these affect currency risk premia, considering separately the valuation of countries' consumption baskets from their sharing of risk.
Posted Content
Changes in Inflation Expectations, Stock Returns, and the Economic State: A Signaling Role for Inflation?
Dissertation
Parameter Learning and the Carry Trade
Abstract: Volatile beliefs generate large and predictable carry trade returns. In a symmetric two country model with power utility, risk aversion of 5, and constant gain learning about mean consumption growth, the carry trade earns a Sharpe ratio of 0.21. I extend this basic model to accommodate correlated belief updates and Epstein-Zin preferences. While certain extensions manage to replicate both large carry trade and equity Sharpe ratios, they are unable to do so simultaneously with smooth exchange rates. My model has the empirical implication that if a group of countries have similar true mean growth rates, then a growth carry of sorting countries by recent consumption growth should earn excess returns on par with the carry trade. I find support for this in a panel of 14 developed world countries. JEL Classification: D83, G12, G15
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Monetary Policy and Bond Prices with Drifting Equilibrium Rates
TL;DR: In this paper , the authors find that bond yields are drifting because they reflect the drift in monetary policy rates, and they detect a significant role of the latter in determining the cyclical properties of yields with short maturities.
Journal ArticleDOI
Real Yield Variability: A Simple Explanation for the UIRP and Related 'Puzzles' in International Finance
TL;DR: The authors derived a dynamic version of the Dornbusch model in which real yields and inflation vary stochastically, and the exchange rate (FX) delivers UIRP in expectations.
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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