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Author: Jason Beeler
Publisher:
ISBN:
Category : Consumption (Economics)
Languages : en
Pages : 50
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Book Description
The long-run risks model of asset prices explains stock price variation as a response to persistent fluctuations in the mean and volatility of aggregate consumption growth, by a representative agent with a high elasticity of intertemporal substitution. This paper documents several empirical difficulties for the model as calibrated by Bansal and Yaron (BY, 2004) and Bansal, Kiku, and Yaron (BKY, 2007a). BY's calibration counterfactually implies that long-run consumption and dividend growth should be highly persistent and predictable from stock prices. BKY's calibration does better in this respect by greatly increasing the persistence of volatility fluctuations and their impact on stock prices. This calibration fits the predictive power of stock prices for future consumption volatility, but implies much greater predictive power of stock prices for future stock return volatility than is found in the data. Neither calibration can explain why movements in real interest rates do not generate strong predictable movements in consumption growth. Finally, the long-run risks model implies extremely low yields and negative term premia on inflation-indexed bonds.
Author: Jason Beeler
Publisher:
ISBN:
Category : Consumption (Economics)
Languages : en
Pages : 50
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Book Description
The long-run risks model of asset prices explains stock price variation as a response to persistent fluctuations in the mean and volatility of aggregate consumption growth, by a representative agent with a high elasticity of intertemporal substitution. This paper documents several empirical difficulties for the model as calibrated by Bansal and Yaron (BY, 2004) and Bansal, Kiku, and Yaron (BKY, 2007a). BY's calibration counterfactually implies that long-run consumption and dividend growth should be highly persistent and predictable from stock prices. BKY's calibration does better in this respect by greatly increasing the persistence of volatility fluctuations and their impact on stock prices. This calibration fits the predictive power of stock prices for future consumption volatility, but implies much greater predictive power of stock prices for future stock return volatility than is found in the data. Neither calibration can explain why movements in real interest rates do not generate strong predictable movements in consumption growth. Finally, the long-run risks model implies extremely low yields and negative term premia on inflation-indexed bonds.
Author: Jason Beeler
Publisher:
ISBN:
Category : Stocks
Languages : en
Pages :
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Book Description
Author: Ravi Bansal
Publisher:
ISBN:
Category : Assets (Accounting)
Languages : en
Pages : 36
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Book Description
We provide an empirical evaluation of the forward-looking long-run risks (LRR) model and highlight model differences with the backward-looking habit based asset pricing model. We feature three key results: (i) Consistent with the LRR model, there is considerable evidence in the data of time-varying expected consumption growth and volatility, (ii) The LRR model matches the key asset markets data features, (iii) In the data and in the LRR model accordingly, past consumption growth does not predict future asset prices, whereas lagged consumption in the habit model forecasts future price-dividend ratios with an R2 of over 40%. Overall, our evidence implies that the LRR model provides a coherent framework to analyze and interpret asset prices.
Author: George M. Constantinides
Publisher:
ISBN:
Category :
Languages : en
Pages : 76
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Book Description
A novel methodology in testing the long-run risks model of Bansal and Yaron (2004) is presented based on the observation that, under the null, the potentially latent state variables, long-run risk and the conditional variance of its innovation, are known affine functions of the observable market-wide price-dividend ratio and risk free rate. In linear forecasting regressions of consumption growth and returns by the price-dividend ratio and risk free rate, the model implies much higher forecastability than what is observed in the data over 1931-2009. The co-integrated variant of the model by Bansal, Gallant, and Tauchen (2007), also implies much higher forecastability of returns than what is observed in the data. Finally, we reject the models' implications in jointly pricing the cross-section of returns and fitting the unconditional time series moments of consumption and dividend growth. The results suggest that either some important state variable is missing or that the models should be generalized in a way that the lagged price-dividend ratio and risk free enter the regressions in a non-linear fashion.
Author: George M. Constantinides
Publisher:
ISBN:
Category : Assets (Accounting)
Languages : en
Pages : 57
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Book Description
The Bansal and Yaron (2004) model of long-run risks (LRR) in aggregate consumption and dividend growth and its cointegrated extension are tested on a cross-section of assets and rejected over 1930-2006. Reversal of earlier conclusions is due to the increased power of the tests resulting from two observations under the null: the latent state variables and, therefore, the pricing kernel are known affine functions of observables; and, the unconditional moments of the time series processes impose constraints in addition to the pricing constraints. The models perform better in postwar subperiods, consistent with evidence of structural-breaks.
Author: Binbin Deng
Publisher:
ISBN:
Category :
Languages : en
Pages : 31
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Book Description
This paper tries to draw on the relative merits of both the jump risk models and the long-run risk models with a linkage established by Bayesian learning, in an attempt to improve both asset pricing approaches in producing a better mechanism for understanding asset prices regularities.Rather than treating event risk as direct jumps in the level of aggregate income, we model it as changes in the underlying state of the world, the economic regimes, which affect aggregate consumption and dividend flows through their growth and volatility's dependence on the state.Realistically, information about the state transition is imperfect in this representative agent endowment economy and agents with recursive utility perform Bayesian learning to form and update beliefs about the conditional state arrival in order to make optimal long-run consumption investment decisions. This new learning component to the consumption-based paradigm will generate novel pricing implications through inducing extra covariance to be priced. Specifically, besides the aggregate uncertainty stemming from jump risk exposure, the presence of imperfect learning behavior also generates individual ambiguity. We shall see that such dual channels can help better explain some asset pricing regularities observed, e.g. the dual puzzles, predictability issues, time-varying conditional moments, etc., and shed some new light on the long-run cash flow news approach in asset pricing.
Author: Ravi Bansal
Publisher:
ISBN:
Category : Assets (Accounting)
Languages : en
Pages :
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Book Description
The long-run risks (LRR) asset pricing model emphasizes the role of low-frequency movements in expected growth and economic uncertainty, along with investor preferences for early resolution of uncertainty, as an important economic-channel that determines asset prices. In this paper, we estimate the LRR model. To accomplish this we develop a method that allows us to estimate models with recursive preferences, latent state variables, and time-aggregated data. Time-aggregation makes the decision interval of the agent an important parameter to estimate. We find that time-aggregation can significantly affect parameter estimates and statistical inference. Imposing the pricing restrictions and explicitly accounting for time-aggregation, we show that the estimated LRR model can account for the joint dynamics of aggregate consumption, asset cash flows and prices, including the equity premia, risk-free rate and volatility puzzles.
Author: Ravi Bansal
Publisher:
ISBN:
Category :
Languages : en
Pages : 34
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Book Description
The recently developed long-run risks asset pricing model shows that concerns about long-run expected growth and time-varying uncertainty (i.e., volatility) about future economic prospects drive asset prices. These two channels of economic risks can account for the risk premia and asset price fluctuations. In addition, the model can empirically account for the cross-sectional differences in asset returns. Hence, the long-run risks model provides a coherent and systematic framework for analyzing financial markets.
Author: George M. Constantinides
Publisher:
ISBN:
Category : Rate of return
Languages : en
Pages : 57
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Book Description
Author: James W. Kolari
Publisher: Springer Nature
ISBN: 3030651975
Category : Business & Economics
Languages : en
Pages : 326
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Book Description
This book proposes a new capital asset pricing model dubbed the ZCAPM that outperforms other popular models in empirical tests using US stock returns. The ZCAPM is derived from Fischer Black’s well-known zero-beta CAPM, itself a more general form of the famous capital asset pricing model (CAPM) by 1990 Nobel Laureate William Sharpe and others. It is widely accepted that the CAPM has failed in its theoretical relation between market beta risk and average stock returns, as numerous studies have shown that it does not work in the real world with empirical stock return data. The upshot of the CAPM’s failure is that many new factors have been proposed by researchers. However, the number of factors proposed by authors has steadily increased into the hundreds over the past three decades. This new ZCAPM is a path-breaking asset pricing model that is shown to outperform popular models currently in practice in finance across different test assets and time periods. Since asset pricing is central to the field of finance, it can be broadly employed across many areas, including investment analysis, cost of equity analyses, valuation, corporate decision making, pension portfolio management, etc. The ZCAPM represents a revolution in finance that proves the CAPM as conceived by Sharpe and others is alive and well in a new form, and will certainly be of interest to academics, researchers, students, and professionals of finance, investing, and economics.
