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 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 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

Volatility Trading: What Is the Role of the Long-Run Volatility Component?

2012 ◽  
Vol 47 (2) ◽  
pp. 273-307 ◽  
Author(s):  
Guofu Zhou ◽  
Yingzi Zhu
Keyword(s):  
Asset Allocation ◽  
Stochastic Volatility Model ◽  
Economic Losses ◽  
Recursive Utility ◽  
Elasticity Of Intertemporal Substitution ◽  
Long Run ◽  
Volatility Model ◽  
The Impact ◽  
Hedging Demand

AbstractWe study an investor’s asset allocation problem with a recursive utility and with tradable volatility that follows a 2-factor stochastic volatility model. Consistent with previous findings under the additive utility, we show that the investor can benefit substantially from volatility trading due to hedging demand. Unlike existing studies, we find that the impact of elasticity of intertemporal substitution (EIS) on investment decisions is of 1st-order importance. Moreover, the investor can incur significant economic losses due to model and/or parameter misspecifications where the EIS better captures the investor’s attitude toward risk than the risk aversion parameter.

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 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
Sign in / Sign up

Export Citation Format

Share Document