Risks for the long run: A potential resolution of asset pricing puzzles

Published

Journal Article (Review)

We model consumption and dividend growth rates as containing (1) a small longrun predictable component, and (2) fluctuating economic uncertainty (consumption volatility). These dynamics, for which we provide empirical support, in conjunction with Epstein and Zin's (1989) preferences, can explain key asset markets phenomena. In our economy, financial markets dislike economic uncertainty and better long-run growth prospects raise equity prices. The model can justify the equity premium, the risk-free rate, and the volatility of the market return, risk-free rate, and the price-dividend ratio, As in the data, dividend yields predict returns and the volatility of returns is time-varying.

Full Text

Duke Authors

Cited Authors

  • Bansal, R; Yaron, A

Published Date

  • August 1, 2004

Published In

Volume / Issue

  • 59 / 4

Start / End Page

  • 1481 - 1509

International Standard Serial Number (ISSN)

  • 0022-1082

Digital Object Identifier (DOI)

  • 10.1111/j.1540-6261.2004.00670.x

Citation Source

  • Scopus