The forward- and the equity-premium puzzles: two symptoms of the same illness?
AbstractUsing information on US domestic financial data only, we build a stochastic discountfactor—SDF— and check whether it accounts for foreign markets stylized factsthat escape consumption based models. By interpreting our SDF as the projection ofa pricing kernel from a fully specified model in the space of returns, our results indicatethat a model that accounts for the behavior of domestic assets goes a long waytoward accounting for the behavior of foreign assets prices. We address predictabilityissues associated with the forward premium puzzle by: i) using instruments that areknown to forecast excess returns in the moments restrictions associated with Eulerequations, and; ii) by pricing Lustig and Verdelhan (2007)’s foreign currency portfolios.Our results indicate that the relevant state variables that explain foreign-currencymarket asset prices are also the driving forces behind U.S. domestic assets behavior.
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Bibliographic InfoPaper provided by Graduate School of Economics, Getulio Vargas Foundation (Brazil) in its series Economics Working Papers (Ensaios Economicos da EPGE) with number 712.
Date of creation: 05 Nov 2010
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- Matos, Paulo & Costa, Carlos Eugênio da & Issler, João Victor, 2007. "The Forward- and the Equity-Premium Puzzles: Two Symptoms of the Same Illness?," Economics Working Papers (Ensaios Economicos da EPGE) 649, Graduate School of Economics, Getulio Vargas Foundation (Brazil).
- Costa, Carlos Eugênio da & Issler, João Victor & Matos, Paulo F., 2009. "The Forward- and the Equity-Premium Puzzles: Two Symptoms of the Same Illness?," Economics Working Papers (Ensaios Economicos da EPGE) 697, Graduate School of Economics, Getulio Vargas Foundation (Brazil).
- Costa, Carlos Eugênio da & Issler, João Victor & Matos, Paulo F., 2012. "The Forward- and the Equity-Premium Puzzles: Two Symptoms of the Same Illness?," Economics Working Papers (Ensaios Economicos da EPGE) 732, Graduate School of Economics, Getulio Vargas Foundation (Brazil).
- NEP-ALL-2010-11-13 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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- Andrei G. Simonassi, 2006. "Estimando A Taxa De Retorno Livre De Risco No Brasil," Anais do XXXIV Encontro Nacional de Economia [Proceedings of the 34th Brazilian Economics Meeting] 180, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
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