Download or read book Asset Pricing with Countercyclical Household Consumption Risk written by George M. Constantinides and published by . This book was released on 2014 with total page 49 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper presents evidence that shocks to household consumption growth are negatively skewed, persistent, and countercyclical and play a major role in driving asset prices. We construct a parsimonious model in which heterogeneous households have recursive preferences and a single state variable drives the conditional cross-sectional moments of household consumption growth. We demonstrate, under certain conditions, the existence of equilibrium in such a heterogeneous-household economy. The estimated model provides a good fit for the moments of the cross-sectional distribution of household consumption growth and the unconditional moments of the risk free rate, equity premium, market price-dividend ratio, and aggregate dividend and consumption growth. The explanatory power of the model does not derive from possible predictability of aggregate dividend and consumption growth as these are intentionally modeled as i.i.d. processes. Consistent with empirical evidence, the model implies that the risk free rate and price-dividend ratio are pro-cyclical while the expected market return and the variance of the market return and risk free rate are countercyclical. Household consumption risk also explains the cross-section of excess returns.
Download or read book Evaluating Asset Pricing Models with Limited Commitment Using Household Consumption Data written by Dirk Krueger and published by . This book was released on 2007 with total page 28 pages. Available in PDF, EPUB and Kindle. Book excerpt: We evaluate the asset pricing implications of a class of models in which risk sharing is imperfect because of limited enforcement of intertemporal contracts. Lustig (2004) has shown that in such a model the asset pricing kernel can be written as a simple function of the aggregate consumption growth rate and the growth rate of consumption of the set of households that do not face binding enforcement constraints. These unconstrained households have lower consumption growth rates than all other households in the economy. We use household data on consumption growth from the U.S. Consumer Expenditure Survey to identify unconstrained households, to estimate the pricing kernel implied by these models and evaluate their performance in pricing aggregate risk. We find that for high values of the relative risk aversion coefficient, the limited enforcement pricing kernel generates a market price of risk that is substantially closer to the data than the one obtained using the standard complete markets asset pricing kernel.
Download or read book Asset Pricing with Heterogeneous Consumers and Limited Participation written by Alon Brav and published by . This book was released on 2002 with total page 64 pages. Available in PDF, EPUB and Kindle. Book excerpt: We present evidence that the equity premium and the premium of value stocks over growth stocks are explained in the 1982 1996 period with a stochastic discount factor (SDF) calculated as the weighted average of individual households' marginal rate of substitution with low and economically plausible values of the relative risk aversion (RRA) coefficient. Household consumption of non-durables and services is reconstructed from the CEX database. Since the above premia are not explained with a SDF calculated as the per capita marginal rate of substitution with low value of the RRA coefficient, the evidence supports the hypothesis of incomplete consumption insurance. We also present evidence is that a SDF calculated as the per capita marginal rate of substitution is better able to explain the equity premium and does so with a lower value of the RRA coefficient, as the definition of asset holders is tightened to recognize the limited participation of households in the capital market.
Download or read book Asset Pricing with Left Skewed Long Run Risk in Durable Consumption written by Wei Yang and published by . This book was released on 2014 with total page 55 pages. Available in PDF, EPUB and Kindle. Book excerpt: I document that durable consumption growth is persistent and predicted by the price-dividend ratio. This provides strong and direct evidence for the existence of a highly persistent expected component. I also document robust evidence that durable consumption growth is left skewed and exhibits time-varying volatility. Based on these empirical properties, I model durable consumption growth as containing a persistent expected component and driven by shocks with counter-cyclical volatility. I embed the durable consumption growth dynamics and random walk nondurable consumption growth in nonseparable Epstein-Zin preferences, and model dividend growth as a levered claim on the expected component of durable consumption growth. The resulting model can explain a number of asset pricing phenomena, including pro-cyclical price-dividend ratios, large and counter-cyclical equity premia and stock return volatilities, low and smooth risk-free rates, and the predictability of stock returns. The model also generates the volatility feedback effect and an upward sloping term structure of real bond yields.
Download or read book Asset Pricing with Long Run Risks in Consumption Growth written by George M. Constantinides and published by . This book was released on 2008 with total page 57 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Asset Pricing with Idiosyncratic Risk and Overlapping Generations written by Kjetil Storesletten and published by . This book was released on 2001 with total page 64 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Asset Pricing Tests with Long Run Risks in Consumption Growth written by George M. Constantinides and published by . This book was released on 2011 with total page 76 pages. Available in PDF, EPUB and Kindle. Book excerpt: A novel methodology in testing the long-run risks model of Bansal and Yaron (2004) is presented based on the observation that, under the null, the potentially latent state variables, long-run risk and the conditional variance of its innovation, are known affine functions of the observable market-wide price-dividend ratio and risk free rate. In linear forecasting regressions of consumption growth and returns by the price-dividend ratio and risk free rate, the model implies much higher forecastability than what is observed in the data over 1931-2009. The co-integrated variant of the model by Bansal, Gallant, and Tauchen (2007), also implies much higher forecastability of returns than what is observed in the data. Finally, we reject the models' implications in jointly pricing the cross-section of returns and fitting the unconditional time series moments of consumption and dividend growth. The results suggest that either some important state variable is missing or that the models should be generalized in a way that the lagged price-dividend ratio and risk free enter the regressions in a non-linear fashion.
Download or read book Technological Growth Asset Pricing and Consumption Risk written by and published by . This book was released on 2006 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Countercyclical Stockholders Consumption Risk and Tests of Conditional CCAPM written by Redouane Elkamhi and published by . This book was released on 2019 with total page 67 pages. Available in PDF, EPUB and Kindle. Book excerpt: Heterogeneous-agents asset pricing theories imply that stockholders' consumption has the first-order effect on equity premium. Motivated by these theories, we evaluate the performance of the conditional CCAPM in explaining time-variation in market returns and cross-sectional variation in portfolio returns. At the market level, we show that the conditional stockholders' consumption risk has strong predictive power for market returns with 39% in-sample and 19% out-of-sample R-squared for the three-year horizon, outperforming a broad set of alternative predictors. At the portfolio-level, stockholders' consumption risk explains 40% of the cross-sectional average returns. Stockholders' consumption risk also partially explains the value, size, profitability, investment, and long-term reversal premia. We provide an explanation for why stockholders' consumption risk reverses the findings in the literature using aggregate consumption risk: stockholders' consumption risk varies in the opposite direction to aggregate consumption risk, but in the same direction with the equity premium and value premium. This article also demonstrates that time-variation in both the price and amount of risk should be considered in testing the CCAPM.
Download or read book The Predictability Implied by Consumption Based Asset Pricing Models written by Jiun-Lin Chen and published by . This book was released on 2018 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: The consumption-based models have a lack of predictive power for explaining variability of stock returns. This paper examines two well-known models, Campbell and Cochrane (1999)'s habit model and Bansal and Yaron (2004)'s long-run risks model, to see whether they produce a significant power of return predictability. For the habit model, empirical tests reveal that the state variable, the surplus consumption ratio, explains counter-cyclical time-varying expected returns. The long-run risks model also proves to explain that main sources of volatility in price-dividend ratio are a persistent and predictable consumption growth rate and fluctuating economic uncertainty. The models are also tested by following the work of Kirby (1998) whether they can explain the observed return predictability. Both models fail to generate any significant predictive power. The habit model is relatively strong in volatility, which implies that variation in expected excess return is largely attributable to the time-varying risk aversion.
Download or read book Essays in Asset Pricing and Applied Micro economics written by Mark William Clements and published by . This book was released on 2015 with total page 532 pages. Available in PDF, EPUB and Kindle. Book excerpt: In the first chapter, Christian Goulding and I present a model of asset prices with recursive preferences and the simple consumption growth dynamics of Mehra and Prescott (1985) but relax the assumption that preference parameters are constant over time. We show that rare, temporary, and plausible fluctuations in the elasticity of inter-temporal substitution (EIS) and risk aversion (RA) can quantitatively explain numerous regularities in U.S. asset prices including: the equity premium and risk-free rate puzzles, excess return and consumption growth predictability, a counter-cyclical risk premium and an upward-sloping real yield curve. A novel implication is that time-varying EIS is more important than time-varying RA for explaining many of these regularities, suggesting a new source of risk in investors' ability to plan their consumption over long horizons. In addition, our model can accommodate a behavioral interpretation of psychological factors (e.g. fear) that drive fluctuations in asset prices beyond traditional risk factors.
Download or read book Moody and Dissatisfied written by Muhammed Yönaç and published by . This book was released on 2019 with total page 39 pages. Available in PDF, EPUB and Kindle. Book excerpt: Recent microeconomic evidence suggests that risk aversion is largely determined by the changes in the state of the economy and mostly insensitive to the fluctuations in idiosyncratic wealth. I propose a consumption-based asset pricing model that is consistent with this evidence and capable of explaining various stylized facts about the U.S. stock market. In the model, agents have a power-utility type instantaneous utility function whose curvature explicitly depends on a stationary macroeconomic state variable. The model can produce a high equity risk premium with a low, stable and wealth-insensitive relative risk aversion if the utility curvature is mildly countercyclical (i.e., if the agents are mildly "moody") and consumption is sufficiently smaller than a predetermined benchmark (i.e., if the agents are sufficiently "dissatisfied") at the steady state. It also gives a low and stable risk-free rate, procyclical price-dividend ratio, countercylical risk premium and price of risk, return predictability, an upward sloping real yield curve and a downward sloping equity term structure.
Download or read book Empirical Tests of Consumption based Asset Pricing Models Using Household level Consumption Data written by Nataliya Polkovnichenko and published by . This book was released on 2008 with total page 214 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Asset Pricing with Endogenous State Dependent Risk Aversion written by Rachida Ouysse and published by . This book was released on 2020 with total page 53 pages. Available in PDF, EPUB and Kindle. Book excerpt: We present an economy where aggregate risk aversion is stochastic and state-dependent in response to information about the wider economy. A factor model is used to link aggregate risk aversion to the business cycle and to handle high-dimensionality of the information about the economy. Our estimated aggregate risk aversion is counter-cyclical and varies with news about economic booms and busts. We find new evidence of volatility clustering of risk aversion around recessions. In addition to the price of consumption risk associated with consumption risk, time variation in risk aversion introduces risk preferences as a new component of the risk premium.
Download or read book Is Consumption Growth Only a Sideshow in Asset Pricing written by Thomas A. Maurer and published by . This book was released on 2012 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: I show that risk sources such as unexpected demographic changes or shocks to the agent's subjective time preferences may have stronger implications and be of greater importance for asset pricing than risk in the (aggregate) consumption growth process. In the first chapter, I discuss stochastic changes to time preferences. Shocks to the agent's subjective time discounting of future utility cause stochastic changes in asset prices and the agent's value function. Independent of the consumption growth process, shocks to time discounting imply a covariation between asset returns and the marginal utility process, and the equity premium is non-zero. My model can generate both a reasonably low level and volatility in the risk-free real interest rate and a high stock price volatility and equity premium. If time discounting follows a process with mean- reversion, then the interest rate process is mean-reverting and stock returns are (at long horizons) negatively auto-correlated. In the second chapter, I analyze the asset pricing implications of birth and death rate shocks in an overlapping generations model. The interest rate and the equity premium are time varying and under certain conditions the interest rate is lower and the equity premium is higher during periods characterized by a high birth rate and low mortality than in times of a low birth rate and high mortality. Demographic changes may explain substantial parts of the time variation in the real interest rate and the equity premium. Demographic uncertainty implies a large unconditional variation in asset returns and leads to stochastic changes in the conditional volatility of stock returns. In the last chapter, I illustrate how shocks to the death rate may affect expected asset returns in the cross-section. An agent demands more of an asset with higher (lower) payoff in states of the world when he expects to live longer (shorter) and marginal utility is high (low) than an asset with the opposite payoff schedule. In equilibrium, the first asset pays a lower expected return than the latter. Empirical evidence supports the model. Out-of-sample evidence suggests that a strategy, which loads on uncertainty in the death rate, pays a positive unexplained return according to traditional market models.
Download or read book Asset Pricing with a Financial Sector written by Kai Li and published by . This book was released on 2013 with total page 65 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper studies the quantitative asset pricing implications of financial intermediary which faces an endogenous leverage constraint. I use a recursive method to construct the global solution that accounts for occasionally binding constraint. Quantitatively, the model generates a high and countercyclical equity premium, a low and smooth risk-free interest rate, and a procyclical and persistent variation of price-dividend ratio, despite an independently and identically distributed consumption growth process and a moderate risk aversion of 10. As a distinct prediction from the model, when the intermediary is financially constrained, interest rate spread between interbank and household loans spikes. This pattern is consistent with the empirical evidence that high TED spread coincides with low stock price and high stock market volatility, which I confirm in the data.
Download or read book Disagreement Over the Long Run written by Bryce Little and published by . This book was released on 2017 with total page 67 pages. Available in PDF, EPUB and Kindle. Book excerpt: I present a novel asset pricing model where agents have private signals about the long-run conditional mean growth rates of their consumption and dividend endowments. Agents use their private information in combination with publicly known observables to endogenously form model consistent expectations. In the absence of arbitrage, agents are left forecasting the beliefs of other agents, more commonly known to the literature as higher order expectations. The model generates a countercyclical price of risk for news about long-run growth. Agents' precision about the true mean growth rate improves during bad times, rendering prices more sensitive to new information. However, the price of risk quickly becomes small and insubstantial if the scale noise grows large, clouding agents' perception of the true conditional mean. Therefore the success of asset pricing models with long-run risks hinges on agents' heterogeneous beliefs about future growth sharing a tight distribution around the truth. The model also makes a new contribution to the consumption based literature in that it can match features of time-varying disagreement in real consumption growth forecasts from the Survey of Professional Forecasters. Heteroskedasticity in agents' endowments drives the cross-sectional dispersion of beliefs about future consumption growth.
