Equity-Premium And Risk-Free-Rate Puzzles At Long Horizons
AbstractThe failure of consumption-based asset pricing models to match thestochastic properties of the equity premium and the risk-free ratehas been attributed by some authors to frictions, transaction costs,or durability. However, such frictions primarily would affect thehigher-frequency data components: Consumption-based pricing modelsthat concentrate on long-horizon returns should be more successful.We consider two consumption-based models: time-separable utility, andthe habit model of Constantinides. We estimate a vector ARCH modelthat includes the pricing kernel and the equity return, and use thefitted model to assess the model s implications for the equitypremium and for the risk-free rate. Neither model performs well at aquarterly horizon, but at longer horizons the Constantinides modelcan match the mean and the variance of the observed equity premium,captures time variation of the equity premium, and can better matchthe observed risk-free rate. We conclude that the equity-premium andrisk-free-rate puzzles are primarily problems for shorter-horizonreturns.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Cambridge University Press in its journal Macroeconomic Dynamics.
Volume (Year): 1 (1997)
Issue (Month): 02 (June)
Contact details of provider:
Postal: The Edinburgh Building, Shaftesbury Road, Cambridge CB2 2RU UK
Fax: +44 (0)1223 325150
Web page: http://journals.cambridge.org/jid_MDYProvider-Email:email@example.com
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Cogley, Timothy, 2002. "Idiosyncratic risk and the equity premium: evidence from the consumer expenditure survey," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 309-334, March.
- Balduzzi, Pierluigi & Yao, Tong, 2007. "Testing heterogeneous-agent models: an alternative aggregation approach," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 369-412, March.
- John Cochrane, 2005.
"Financial Markets and the Real Economy,"
NBER Working Papers
11193, National Bureau of Economic Research, Inc.
- Canzoneri, Matthew B. & Cumby, Robert E. & Diba, Behzad T., 2007. "Euler equations and money market interest rates: A challenge for monetary policy models," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 1863-1881, October.
- Randolph B. Cohen & Christopher Polk & Tuomo Vuolteenaho, 2009.
"The Price Is (Almost) Right,"
Journal of Finance,
American Finance Association, vol. 64(6), pages 2739-2782, December.
- Sheng Guo, 2009. "Switching Regression Estimates of EIS for Stockholders and Non-Stockholders," Working Papers 0903, Florida International University, Department of Economics.
- Chrétien, Stéphane, 2012. "Bounds on the autocorrelation of admissible stochastic discount factors," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 1943-1962.
- Jianfeng Yu, 2012.
"Using Long-Run Consumption-Return Correlations to Test Asset Pricing Models,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 15(3), pages 317-335, October.
- Jianfeng Yu, 2012. "Code and data files for "Using Long-Run Consumption-Return Correlations to Test Asset Pricing Models"," Computer Codes 10-230, Review of Economic Dynamics.
- Jianfeng Yu, 2012. "Online Appendix to "Using Long-Run Consumption-Return Correlations to Test Asset Pricing Models"," Technical Appendices 10-230, Review of Economic Dynamics.
- Victoria Galsband, 2010. "The cross-section of equity returns and assets’ fundamental cash-flow risk," Financial Markets and Portfolio Management, Springer, vol. 24(4), pages 327-351, December.
- Stanislav Khrapov, 2012. "Risk Premia: Short and Long-term," Working Papers w0169, Center for Economic and Financial Research (CEFIR).
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Keith Waters).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.