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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
Citations
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DSGE Model of the Russian Economy: Economic Impact of Oil Price
TL;DR: In this paper, the authors proposed a DSGE model based on the theory of adaptive expectations to predict the yields of government bonds in 2018-2020, the proposed modification of the Taylor rule and the components of the prediction rate of the Russian ruble.
The Information Content of Surprise Changes in the Fed Funds Futures Rate
TL;DR: The authors decompose futures rate surprise to show that these surprise are not clean monetary shocks, but contaminated by information shocks due to the information gap between the Fed and the market, and revise in risk premia due to revelation of the information gaps.
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Economic-state Variation in Uncertainty-Yield Dynamics
TL;DR: This paper showed that short-term fluctuations in precautionary-savings and consumption-smoothing forces are particularly influential on interest rate dynamics during weaker economic times, and provided additional evidence to probe interpretation.
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Asset prices with stochastic volatilities and a UIP puzzle
TL;DR: In this paper, the authors extend the two-country general equilibrium model with smooth transition regimes in volatilities to examine the time-varying features of foreign exchange excess returns.
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The Multiplicative Wedge Approach to Incomplete Markets and the Trifecta of Exchange Rate Puzzles
Gurdip Bakshi,John Crosby +1 more
TL;DR: The authors analytically show that the currency risk premium is detached from the multiplicative wedge perturbation, which implies that the approach cannot resolve the forward premium puzzle, and it is not feasible to reproduce the low unconditional volatility of exchange rate growth with realistic parameterizations.
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.
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