Consumption-Based Asset Pricing, Part 2: Habit Formation, Conditional Risks, Long-Run Risks, and Rare Disasters

2015 ◽  
Vol 7 (1) ◽  
pp. 85-131 ◽  
Author(s):  
Douglas T. Breeden ◽  
Robert H. Litzenberger ◽  
Tingyan Jia
Keyword(s):  
Asset Pricing ◽  
Habit Formation ◽  
Long Run ◽  
Rare Disasters ◽  
Long Run Risks

scholarly journals How Much Would You Pay to Resolve Long-Run Risk?

2014 ◽  
Vol 104 (9) ◽  
pp. 2680-2697 ◽  
Author(s):  
Larry G. Epstein ◽  
Emmanuel Farhi ◽  
Tomasz Strzalecki
Keyword(s):  
Asset Pricing ◽  
Temporal Resolution ◽  
Recursive Utility ◽  
Elasticity Of Intertemporal Substitution ◽  
Careful Scrutiny ◽  
Long Run ◽  
Quantitative Properties ◽  
Long Run Risks ◽  
Asset Pricing Puzzles ◽  
Long Run Risk

Though risk aversion and the elasticity of intertemporal substitution have been the subjects of careful scrutiny, the long-run risks literature as well as the broader literature using recursive utility to address asset pricing puzzles has ignored the full implications of their parameter specifications. Recursive utility implies that the temporal resolution of risk matters and a quantitative assessment thereof should be part of the calibration process. This paper gives a sense of the magnitudes of implied timing premia. Its objective is to inject temporal resolution of risk into the discussion of the quantitative properties of long-run risks and related models. (JEL D81, G11, G12)

scholarly journals A Long-Run Risks Model of Asset Pricing with Fat Tails*

2009 ◽  
Vol 14 (3) ◽  
pp. 409-449 ◽  
Author(s):  
Zhiguang (Gerald) Wang ◽  
Prasad V. Bidarkota
Keyword(s):  
Asset Pricing ◽  
Fat Tails ◽  
Long Run ◽  
Long Run Risks

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

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.

scholarly journals Growth-Rate and Uncertainty Shocks in Consumption: Cross-Country Evidence

2017 ◽  
Vol 9 (1) ◽  
pp. 1-39 ◽  
Author(s):  
Emi Nakamura ◽  
Dmitriy Sergeyev ◽  
Jón Steinsson
Keyword(s):  
Growth Rate ◽  
Asset Pricing ◽  
Equity Premium ◽  
Developed Countries ◽  
Parameter Estimates ◽  
Uncertainty Shocks ◽  
Long Run ◽  
Cross Country ◽  
Long Run Risks ◽  
Shock Exposure

We provide new estimates of the importance of growth-rate shocks and uncertainty shocks for developed countries. The shocks we estimate are large and correspond to well-known macroeconomic episodes such as the Great Moderation and the productivity slowdown. We compare our results to earlier estimates of “ long-run risks” and assess the implications for asset pricing. Our estimates yield greater return predictability and a more volatile price-dividend ratio. In addition, we can explain a substantial fraction of cross-country variation in the equity premium. An advantage of our approach, based on macroeconomic data alone, is that the parameter estimates cannot be viewed as backward engineered to fit asset pricing data. We provide intuition for our results using the recently developed framework of shock-exposure and shock-price elasticities. (JEL E21, E32, E44, G12, G35)

Explaining Puzzles

2017 ◽  
Author(s):  
Kerry E. Back
Keyword(s):  
Equity Premium ◽  
Labor Income ◽  
Income Risk ◽  
Labor Income Risk ◽  
Catching Up ◽  
Long Run ◽  
Rare Disasters ◽  
Risk Free Rate ◽  
Long Run Risks ◽  
Free Rate

Various models proposed to explain the equity premium or risk‐free rate puzzle are explained: external habits (Abel’s “catching up with the Joneses” model and the Campbell‐Cochrane model), rare disasters, Epstein‐Zin‐Weil utility, long run risks, and idiosyncratic uninsurable labor income risk. External habits allow the SDF to be variable without requiring high variability of consumption. The SDF for a representative investor with Epstein‐Zin‐Weil utility depends on consumption and the market return. It is most useful when the world is not IID, as in the long‐run risks model. With uninsurable labor income risk, there is no representative investor even if investors all have the same CRRA utility, and there is additional exibility to explain asset returns.

scholarly journals Asset Pricing Tests with Long-run Risks in Consumption Growth

2011 ◽  
Vol 1 (1) ◽  
pp. 96-136 ◽  
Author(s):  
George M. Constantinides ◽  
Anisha Ghosh
Keyword(s):  
Asset Pricing ◽  
Consumption Growth ◽  
Long Run ◽  
Long Run Risks ◽  
Asset Pricing Tests
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