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Long-run risks and financial markets

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  • Ravi Bansal

Abstract

The recently developed long-run risks asset pricing model shows that concerns about long-run expected growth and time-varying uncertainty (i.e., volatility) about future economic prospects drive asset prices. These two channels of economic risks can account for the risk premia and asset price fluctuations. In addition, the model can empirically account for the cross-sectional differences in asset returns. Hence, the long-run risks model provides a coherent and systematic framework for analyzing financial markets.

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Bibliographic Info

Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (2007)
Issue (Month): Jul ()
Pages: 283-300

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Handle: RePEc:fip:fedlrv:y:2007:i:jul:p:283-300:n:v.89no.4

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Keywords: Financial markets ; Risk;

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Cited by:
  1. Shaliastovich, Ivan & Tauchen, George, 2011. "Pricing of the time-change risks," Journal of Economic Dynamics and Control, Elsevier, vol. 35(6), pages 843-858, June.
  2. Thomas J. Sargent, 2007. "Commentary on "Long-run risks and financial markets"," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 301-304.
  3. Prasad V. Bidarkota, 2008. "Incomplete Information in a Long Run Risks Model of Asset Pricing," Working Papers 0802, Florida International University, Department of Economics.
  4. Ferson, Wayne & Nallareddy, Suresh & Xie, Biqin, 2013. "The “out-of-sample” performance of long run risk models," Journal of Financial Economics, Elsevier, vol. 107(3), pages 537-556.
  5. Zhiguang Wang & Prasad V. Bidarkota, 2008. "A Long-Run Risks Model of Asset Pricing with Fat Tails," Working Papers 0810, Florida International University, Department of Economics.

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