Asset Pricing With Left Skewed Long Run Risk In Durable Consumption PDF Download
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| Author | : Wei Yang |
| Publisher | : |
| Total Pages | : 55 |
| Release | : 2014 |
| Genre | : |
| ISBN | : |
Download Asset Pricing with Left-Skewed Long-Run Risk in Durable Consumption Book in PDF, ePub and Kindle
I document that durable consumption growth is persistent and predicted by the price-dividend ratio. This provides strong and direct evidence for the existence of a highly persistent expected component. I also document robust evidence that durable consumption growth is left skewed and exhibits time-varying volatility. Based on these empirical properties, I model durable consumption growth as containing a persistent expected component and driven by shocks with counter-cyclical volatility. I embed the durable consumption growth dynamics and random walk nondurable consumption growth in nonseparable Epstein-Zin preferences, and model dividend growth as a levered claim on the expected component of durable consumption growth. The resulting model can explain a number of asset pricing phenomena, including pro-cyclical price-dividend ratios, large and counter-cyclical equity premia and stock return volatilities, low and smooth risk-free rates, and the predictability of stock returns. The model also generates the volatility feedback effect and an upward sloping term structure of real bond yields.
| Author | : Ziemowit Bednarek |
| Publisher | : |
| Total Pages | : 19 |
| Release | : 2015 |
| Genre | : |
| ISBN | : |
Download Long-run Risk, Durable Consumption Growth and Estimation of Risk Aversion Book in PDF, ePub and Kindle
We present a durable consumption-based asset pricing model with Epstein-Zin preferences and the pricing kernel accommodating the long-run consumption risk. Consumption growth includes a small predictable component as in Bansal and Yaron (2004). The model is estimated with simple econometric techniques once we linearize it around a special case of the elasticity of inter- and intra-temporal substitution equal to one. After including the long-run consumption growth, the estimates of the model parameters become much more realistic and the fit closer to the data than for the case of the contemporaneous consumption growth. For example, the estimate of risk aversion falls from around 200 to 10, and the R2 increases from around 30% to 60%.
| Author | : George M. Constantinides |
| Publisher | : |
| Total Pages | : 57 |
| Release | : 2008 |
| Genre | : Rate of return |
| ISBN | : |
Download Asset Pricing with Long Run Risks in Consumption Growth Book in PDF, ePub and Kindle
| Author | : Douglas T. Breeden |
| Publisher | : |
| Total Pages | : |
| Release | : 2015 |
| Genre | : |
| ISBN | : |
Download Consumption-Based Asset Pricing, Part 2 Book in PDF, ePub and Kindle
Following Part 1 of this article, which reviews late-1970s to 1990s classic derivations and tests of the consumption capital asset pricing model, here in Part 2 we review more recent developments, some of which are based on utility functions with non-time-separable preferences. Important second-generation consumption-based asset pricing advances are also reviewed, including models with habit formation and long-run risk. These models give large cyclical changes in relative risk aversion and risk premiums as well as lagged impacts of aggregate consumption changes on risk premiums. We review asset pricing with rare disasters and models focused on consumer spending on durables and real estate, as well as the fraction of spending financed by labor income. The second-generation models discussed have more free parameters and fit the empirical data better than did the first-generation consumption-based asset pricing models.
| Author | : Francisco Vazquez-Grande |
| Publisher | : |
| Total Pages | : 83 |
| Release | : 2012 |
| Genre | : |
| ISBN | : 9781267835536 |
Download Learning the Long-run Asset Pricing Model Book in PDF, ePub and Kindle
I document business-cycle properties and a significant increase in the average level of risk-prices in the presence of learning in economies with homogeneous agents, and in the presence of agents with heterogeneous beliefs based on learning. I solve a model with long-run risk where both, the level and persistence of expected consumption growth are unobserved. I introduce a new methodology to quantify the effects of learning about parameter uncertainty and latent variables. The average historical maximum Sharpe ratios increases significantly in the learning economy when compared to the full-information case, and the difference between the subjective risk-prices of learning and non-learning agents is shown to be counter-cyclical. The agent facing parameter uncertainty choose state variables that are sufficient statistics of the learning problems and, conditional on her information set, forms posterior distributions of the states and future consumption growth. To reduce the complexity of optimization, I present a novel numerical approach that approximates the agent's continuation-value by nesting the solutions of problems with different information sets.
| Author | : George M. Constantinides |
| Publisher | : |
| Total Pages | : 76 |
| Release | : 2011 |
| Genre | : |
| ISBN | : |
Download Asset Pricing Tests with Long Run Risks in Consumption Growth Book in PDF, ePub and Kindle
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 | : |
| Total Pages | : 57 |
| Release | : 2008 |
| Genre | : Assets (Accounting) |
| ISBN | : |
Download Asset Pricing Tests with Long Run Risks in Consumption Growth Book in PDF, ePub and Kindle
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 | : Dirk Krueger |
| Publisher | : |
| Total Pages | : 28 |
| Release | : 2007 |
| Genre | : Assets (Accounting) |
| ISBN | : |
Download Evaluating Asset Pricing Models with Limited Commitment Using Household Consumption Data Book in PDF, ePub and Kindle
We evaluate the asset pricing implications of a class of models in which risk sharing is imperfect because of limited enforcement of intertemporal contracts. Lustig (2004) has shown that in such a model the asset pricing kernel can be written as a simple function of the aggregate consumption growth rate and the growth rate of consumption of the set of households that do not face binding enforcement constraints. These unconstrained households have lower consumption growth rates than all other households in the economy. We use household data on consumption growth from the U.S. Consumer Expenditure Survey to identify unconstrained households, to estimate the pricing kernel implied by these models and evaluate their performance in pricing aggregate risk. We find that for high values of the relative risk aversion coefficient, the limited enforcement pricing kernel generates a market price of risk that is substantially closer to the data than the one obtained using the standard complete markets asset pricing kernel.
| Author | : George M. Constantinides |
| Publisher | : |
| Total Pages | : 49 |
| Release | : 2014 |
| Genre | : Assets (Accounting) |
| ISBN | : |
Download Asset Pricing with Countercyclical Household Consumption Risk Book in PDF, ePub and Kindle
This paper presents evidence that shocks to household consumption growth are negatively skewed, persistent, and countercyclical and play a major role in driving asset prices. We construct a parsimonious model in which heterogeneous households have recursive preferences and a single state variable drives the conditional cross-sectional moments of household consumption growth. We demonstrate, under certain conditions, the existence of equilibrium in such a heterogeneous-household economy. The estimated model provides a good fit for the moments of the cross-sectional distribution of household consumption growth and the unconditional moments of the risk free rate, equity premium, market price-dividend ratio, and aggregate dividend and consumption growth. The explanatory power of the model does not derive from possible predictability of aggregate dividend and consumption growth as these are intentionally modeled as i.i.d. processes. Consistent with empirical evidence, the model implies that the risk free rate and price-dividend ratio are pro-cyclical while the expected market return and the variance of the market return and risk free rate are countercyclical. Household consumption risk also explains the cross-section of excess returns.
| Author | : Bryce Little |
| Publisher | : |
| Total Pages | : 67 |
| Release | : 2017 |
| Genre | : |
| ISBN | : |
Download Disagreement Over the Long-Run Book in PDF, ePub and Kindle
I present a novel asset pricing model where agents have private signals about the long-run conditional mean growth rates of their consumption and dividend endowments. Agents use their private information in combination with publicly known observables to endogenously form model consistent expectations. In the absence of arbitrage, agents are left forecasting the beliefs of other agents, more commonly known to the literature as higher order expectations. The model generates a countercyclical price of risk for news about long-run growth. Agents' precision about the true mean growth rate improves during bad times, rendering prices more sensitive to new information. However, the price of risk quickly becomes small and insubstantial if the scale noise grows large, clouding agents' perception of the true conditional mean. Therefore the success of asset pricing models with long-run risks hinges on agents' heterogeneous beliefs about future growth sharing a tight distribution around the truth. The model also makes a new contribution to the consumption based literature in that it can match features of time-varying disagreement in real consumption growth forecasts from the Survey of Professional Forecasters. Heteroskedasticity in agents' endowments drives the cross-sectional dispersion of beliefs about future consumption growth.
