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Risks for the long run: A potential resolution of asset pricing puzzles (1994)
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| Venue: | JOURNAL OF FINANCE |
| Citations: | 761 - 63 self |
BibTeX
@MISC{Bansal94risksfor,
author = {Ravi Bansal and Amir Yaron},
title = {Risks for the long run: A potential resolution of asset pricing puzzles},
year = {1994}
}
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Abstract
We model consumption and dividend growth rates as containing (i) a small long-run predictable component and (ii) fluctuating economic uncertainty (consumption volatility). These dynamics, for which we provide empirical support, in conjunction with Epstein and Zin’s (1989) preferences, can explain key asset markets phenomena. In our economy, financial markets dislike economic uncertainty and better long-run growth prospects raise equity prices. The model can justify the equity premium, the risk-free rate, and the volatility of the market return, risk-free rate, and the price-dividend ratio. As in the data, dividend yields predict returns and the volatility of returns is time-varying.
Keyphrases
long run asset pricing puzzle potential resolution economic uncertainty risk-free rate dividend growth rate price-dividend ratio dividend yield long-run growth prospect equity premium consumption volatility financial market equity price market return small long-run predictable component empirical support key asset market
