scholarly journals Efficient bond price approximations in non-linear equilibrium-based term structure models

2015 ◽  
Vol 19 (1) ◽  
pp. 1-33 ◽  
Author(s):  
Martin M. Andreasen ◽  
Pawel Zabczyk
Keyword(s):  
Term Structure ◽  
Risk Model ◽  
Bond Price ◽  
Third Order ◽  
Approximation Process ◽  
Long Run ◽  
The Us ◽  
Normal Method ◽  
Log Normal ◽  
Long Run Risk

AbstractThis paper develops an efficient method to compute higher-order perturbation approximations of bond prices. At third order, our approach can significantly shorten the approximation process and its precision exceeds the log-normal method and a procedure using consol bonds. The efficiency gains greatly facilitate any estimation which is illustrated by considering a long-run risk model for the US. Allowing for an unconstrained intertemporal elasticity of substitution enhances the model’s fit, and we see further improvements when incorporating stochastic volatility and external habits.

Investor Information, Long-Run Risk, and the Term Structure of Equity

2014 ◽  
Vol 28 (3) ◽  
pp. 706-742 ◽  
Author(s):  
Mariano M. Croce ◽  
Martin Lettau ◽  
Sydney C. Ludvigson
Keyword(s):  
Term Structure ◽  
Long Run ◽  
Long Run Risk

Growth and returns across countries

2021 ◽  
pp. 78-87
Author(s):  
Jesper Rangvid
Keyword(s):  
Economic Growth ◽  
Interest Rates ◽  
Stock Returns ◽  
Stock Prices ◽  
Economic Activity ◽  
Wide Margin ◽  
The Past ◽  
Long Run ◽  
The Us ◽  
Long Run Risk

This chapter examines the relation between long-run economic growth and returns across countries. Have countries that have experienced high GDP growth historically also experienced high stock returns? The chapter contains three main messages. First, there is no clear tendency that countries that have grown fast in the past are also countries that have delivered high stock returns in the past. Second, as in the US, stock prices have in many countries followed economic activity in the long run. Third, real interest rates relate to economic growth across countries in the long run.Another conclusion emerging from this chapter is that long-run stock returns exceed long-run rates of economic growth and long-run risk-free rates by a wide margin.

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 Optimists and Pessimists in (In)Complete Markets

2019 ◽  
Vol 55 (8) ◽  
pp. 2466-2499 ◽  
Author(s):  
Nicole Branger ◽  
Patrick Konermann ◽  
Christian Schlag
Keyword(s):  
Asset Pricing ◽  
Risk Model ◽  
Complete Markets ◽  
Jump Risk ◽  
Recursive Preferences ◽  
Aggregate Consumption ◽  
Market Incompleteness ◽  
Long Run ◽  
Insurance Product ◽  
Long Run Risk

We study the effects of market incompleteness on speculation, investor survival, and asset pricing moments when investors disagree about the likelihood of jumps and have recursive preferences. We consider two models. In a model with jumps in aggregate consumption, incompleteness barely matters because the consumption claim resembles an insurance product against jump risk and effectively reproduces approximate spanning. In a long-run risk model with jumps in the long-run growth rate, market incompleteness affects speculation and investor survival. Jump and diffusive risks are more balanced regarding their importance, and therefore the consumption claim cannot reproduce approximate spanning.

TESTING THE LONG-RUN RISK MODEL: A KALMAN FILTER APPROACH

2018 ◽  
Vol 13 (04) ◽  
pp. 1850019
Author(s):  
JIANQIU WANG ◽  
KE WU
Keyword(s):  
Kalman Filter ◽  
Maximum Likelihood ◽  
Risk Model ◽  
Estimation Method ◽  
Model Performance ◽  
Empirical Support ◽  
Likelihood Estimation ◽  
Long Run ◽  
Filter Approach ◽  
Long Run Risk

This paper reevaluates the Long-Run Risk model proposed by Bansal and Yaron (2004) using the Kalman filter and Maximum Likelihood estimation method. Our findings show that the persistence of the small long-run predictable component in the consumption growth process is the key for the model performance. In our estimation exercises, if we relax the persistence restriction on the long-run risk parameter and adopt a Maximum Likelihood estimate, the Long-Run Risk model still requires a relative risk aversion at around 70 to fit the US data. However, we do not find strong empirical support for the persistence restriction from the data.

The Term Structures of Coentropy in International Financial Markets

2019 ◽  
Vol 65 (8) ◽  
pp. 3541-3558 ◽  
Author(s):  
Fousseni Chabi-Yo ◽  
Riccardo Colacito
Keyword(s):  
Financial Markets ◽  
Risk Model ◽  
Discount Factors ◽  
Model Free ◽  
Term Structures ◽  
Asset Pricing Models ◽  
Long Run ◽  
Stochastic Discount Factors ◽  
Permanent And Transitory Components ◽  
Long Run Risk

We propose a new entropy-based correlation measure (coentropy) to evaluate the performance of international asset pricing models. Coentropy captures the codependence of two random variables beyond normality. We document that the coentropy of international stochastic discount factors (SDFs) can be decomposed into a series of entropy-based correlations of permanent and transitory components of the SDFs. We employ the cross section of G-10 countries to obtain model-free estimates of all the components of coentropy at various horizons and we show that the generalization of the long-run risk model featuring two predictable components of consumption growth rates, global disasters, and recursive preferences can account for the composition of codependence at all horizons. This paper was accepted by Tomasz Piskorski, finance.

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