Term Structure of Risk in Expected Returns

2021 ◽  
Author(s):  
Irina Zviadadze
Keyword(s):  
Asset Pricing ◽  
Term Structure ◽  
Expected Returns ◽  
Pricing Models ◽  
Structural Shocks ◽  
Risk Return ◽  
Asset Pricing Models ◽  
Long Run ◽  
Multiple Shocks ◽  
Long Run Risk

Abstract This paper develops a methodology to test structural asset pricing models based on their implications for the multiperiod risk-return trade-off. A new measure, the term structure of risk, captures the sensitivities of multiperiod expected returns to structural shocks. The level and slope of the term structure of risk can indicate misspecification in equilibrium models. I evaluate the performance of asset pricing models with long-run risk, consumption disasters, and variance shocks. I find that only a model with multiple shocks in the variance of consumption growth is consistent with the propagation of and compensation for risk in the aggregate stock market.

scholarly journals From Which Consumption-Based Asset Pricing Models Can Investors Profit? Evidence from Model-Based Priors

2020 ◽  
Author(s):  
Mathias S Kruttli
Keyword(s):  
Asset Pricing ◽  
Parameter Estimates ◽  
Pricing Models ◽  
Predictive Regression ◽  
Model Based ◽  
Asset Pricing Models ◽  
Long Run ◽  
Regression Parameters ◽  
Economic Constraints ◽  
Long Run Risk

Abstract This article analyzes whether consumption-based asset pricing models improve the excess returns forecasts of a hypothetical investor with access to these models from 1947 onwards. The investor imposes economic constraints derived from asset pricing models as model-based priors on predictive regression parameters through a Bayesian framework. Three models are considered: habit formation, long-run risk, and prospect theory. The model-based priors generally perform better than priors that shrink the parameter estimates to the historical average model and priors that impose a positive equity premium. This analysis helps to assess the value of consumption-based asset pricing models to investors.

scholarly journals Consumption-Based Asset Pricing When Consumers Make Mistakes

2021 ◽  
Vol 2021 (015) ◽  
pp. 1-71
Author(s):  
Chris Anderson ◽  
Keyword(s):  
Asset Pricing ◽  
Stock Returns ◽  
Equity Premium ◽  
Expected Returns ◽  
Power Utility ◽  
Expected Return ◽  
Risk Return ◽  
Asset Pricing Models ◽  
Long Run ◽  
Wide Range

I analyze the implications of allowing consumers to make mistakes on the risk-return relationships predicted by consumption-based asset pricing models. I allow for consumption mistakes using a model in which a portfolio manager selects investments on a consumer's behalf. The consumer has an arbitrary consumption policy that could reflect a wide range of mistakes. For power utility, expected returns do not generally depend on exposure to single-period consumption shocks, but robustly depend on exposure to both long-run consumption and expected return shocks. I empirically show that separately accounting for both types of shocks helps explain the equity premium and cross section of stock returns.

scholarly journals NONPARAMETRIC IDENTIFICATION OF POSITIVE EIGENFUNCTIONS

2014 ◽  
Vol 31 (6) ◽  
pp. 1310-1330 ◽  
Author(s):  
Timothy M. Christensen
Keyword(s):  
Asset Pricing ◽  
Habit Formation ◽  
Linear Operators ◽  
Nondegeneracy Condition ◽  
Pricing Models ◽  
Nonparametric Models ◽  
Asset Pricing Models ◽  
Long Run ◽  
Dynamic Asset Pricing ◽  
Long Run Risk

Important features of certain economic models may be revealed by studying positive eigenfunctions of appropriately chosen linear operators. Examples include long-run risk–return relationships in dynamic asset pricing models and components of marginal utility in external habit formation models. This paper provides identification conditions for positive eigenfunctions in nonparametric models. Identification is achieved if the operator satisfies two mild positivity conditions and a power compactness condition. Both existence and identification are achieved under a further nondegeneracy condition. The general results are applied to obtain new identification conditions for external habit formation models and for positive eigenfunctions of pricing operators in dynamic asset pricing models.

Linear Beta Pricing with Inefficient Benchmarks

2013 ◽  
Vol 03 (01) ◽  
pp. 1350004 ◽  
Author(s):  
George Diacogiannis ◽  
David Feldman
Keyword(s):  
Asset Pricing ◽  
Market Risk ◽  
Expected Returns ◽  
Pricing Model ◽  
Pricing Models ◽  
Expected Return ◽  
Risk Premiums ◽  
Asset Pricing Models ◽  
Current Asset ◽  
Mean Variance

Current asset pricing models require mean-variance efficient benchmarks, which are generally unavailable because of partial securitization and free float restrictions. We provide a pricing model that uses inefficient benchmarks, a two-beta model, one induced by the benchmark and one adjusting for its inefficiency. While efficient benchmarks induce zero-beta portfolios of the same expected return, any inefficient benchmark induces infinitely many zero-beta portfolios at all expected returns. These make market risk premiums empirically unidentifiable and explain empirically found dead betas and negative market risk premiums. We characterize other misspecifications that arise when using inefficient benchmarks with models that require efficient ones. We provide a space geometry description and analysis of the specifications and misspecifications. We enhance Roll (1980), Roll and Ross's (1994), and Kandel and Stambaugh's (1995) results by offering a "Two Fund Theorem," and by showing the existence of strict theoretical "zero relations" everywhere inside the portfolio frontier.

scholarly journals Higher Order Effects in Asset Pricing Models with Long‐Run Risks

2018 ◽  
Vol 73 (3) ◽  
pp. 1061-1111 ◽  
Author(s):  
WALTER POHL ◽  
KARL SCHMEDDERS ◽  
OLE WILMS
Keyword(s):  
Asset Pricing ◽  
Higher Order ◽  
Order Effects ◽  
Pricing Models ◽  
Asset Pricing Models ◽  
Long Run ◽  
Long Run Risks ◽  
Higher Order Effects
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