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Valuation Risk and Asset Pricing

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  • Albuquerque, Rui
  • Eichenbaum, Martin
  • Rebelo, Sérgio

Abstract

Standard representative-agent models have difficulty in accounting for the weak correlation between stock returns and measurable fundamentals, such as consumption and output growth. This failing underlies virtually all modern asset-pricing puzzles. The correlation puzzle arises because these models load all uncertainty onto the supply side of the economy. We propose a simple theory of asset pricing in which demand shocks play a central role. These shocks give rise to valuation risk that allows the model to account for key asset pricing moments, such as the equity premium, the bond term premium, and the weak correlation between stock returns and fundamentals.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9262.

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Date of creation: Dec 2012
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Handle: RePEc:cpr:ceprdp:9262

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Keywords: bond yields; Equity premium; risk premium;

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References

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  1. Epstein, Larry G & Zin, Stanley E, 1991. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: An Empirical Analysis," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 263-86, April.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Valuation Risk and Asset Pricing
    by Christian Zimmermann in NEP-DGE blog on 2012-12-23 14:03:30
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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Cited by:
  1. Pagel, Michaela, 2012. "Expectations-Based Reference-Dependent Preferences and Asset Pricing," MPRA Paper 47933, University Library of Munich, Germany.
  2. Burkhard Heer & Alfred Maussner & Bernd Süssmuth, 2013. "Cyclical Asset Returns in the Consumption and Investment Goods Sector," CESifo Working Paper Series 4364, CESifo Group Munich.
  3. Frank Schorfheide & Dongho Song & Amir Yaron, 2013. "Identifying long-run risks: a bayesian mixed-frequency approach," Working Papers 13-39, Federal Reserve Bank of Philadelphia.

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