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Macroeconomic volatility and the equity premium Author info | Abstract | Publisher info | Download info | Related research | Statistics Keith Sill
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Recent empirical work documents a decline in the U.S. equity premium and a decline in the standard deviation of real output growth. We investigate the link between aggregate risk and the asset returns in a dynamic production based asset-pricing model. When calibrated to match asset return moments, the model implies that the post-1984 reduction in TFP shock volatility of 60 percent gives rise to a 40 percent decline in the equity premium. Lower macroeconomic risk post-1984 can account for a substantial fraction of the decline in the equity premium.
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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number
06-1.
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Date of creation: 2006Date of revision:
Handle: RePEc:fip:fedpwp:06-1Contact details of provider: Postal: 10 Independence Mall, Philadelphia, PA 19106-1574 Web page: http://www.philadelphiafed.org/ More information through EDIRC
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Keywords: Equity Macroeconomics Other versions of this item:
This paper has been announced in the following NEP Reports :
References listed on IDEAS 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.: Ravi Jagannathan & Ellen R. McGrattan & Anna Scherbina., 2000.
"The declining U.S. equity premium ,"
Quarterly Review ,
Federal Reserve Bank of Minneapolis, issue Fall, pages 3-19.
[Downloadable!]
Other versions: Kim, Chang-Jin & Nelson, Charles R & Piger, Jeremy, 2004.
"The Less-Volatile U.S. Economy: A Bayesian Investigation of Timing, Breadth, and Potential Explanations ,"
Journal of Business & Economic Statistics ,
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Other versions:
Chang-Jin Kim & Charles Nelson & Jeremy Piger, 2001.
"The less volatile U.S. economy: a Bayesian investigation of timing, breadth, and potential explanations ,"
International Finance Discussion Papers
707, Board of Governors of the Federal Reserve System (U.S.).
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Working Papers
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[Downloadable!] John Shea, 1998.
"What Do Technology Shocks Do? ,"
NBER Working Papers
6632, National Bureau of Economic Research, Inc.
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Sylvain Leduc & Keith Sill, 2003.
"Monetary policy, oil shocks, and TFP: accounting for the decline in U.S. volatility ,"
Working Papers
03-22, Federal Reserve Bank of Philadelphia.
[Downloadable!]
Other versions:
Sylvain Leduc & Keith Sill, 2006.
"Monetary policy, oil shocks, and TFP: accounting for the decline in U.S. volatility ,"
International Finance Discussion Papers
873, Board of Governors of the Federal Reserve System (U.S.).
[Downloadable!] Sylvain Leduc & Keith Sill, 2007.
"Monetary Policy, Oil Shocks, and TFP: Accounting for the Decline in U.S. Volatility ,"
Review of Economic Dynamics ,
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"Are Technology Improvements Contractionary? ,"
Harvard Institute of Economic Research Working Papers
1986, Harvard - Institute of Economic Research.
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Other versions:
Susanto Basu & John Fernald & Miles Kimball, 2004.
"Are Technology Improvements Contractionary? ,"
NBER Working Papers
10592, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted) Susanto Basu & John Fernald & Miles Kimball, 2004.
"Are technology improvements contractionary? ,"
Working Paper Series
WP-04-20, Federal Reserve Bank of Chicago.
[Downloadable!] Susanto Basu & John Fernald & Miles Kimball, 1998.
"Are technology improvements contractionary? ,"
International Finance Discussion Papers
625, Board of Governors of the Federal Reserve System (U.S.).
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"Are Technology Improvements Contractionary? ,"
American Economic Review ,
American Economic Association, vol. 96(5), pages 1418-1448, December.
Mehra, Rajnish & Prescott, Edward C., 1985.
"The equity premium: A puzzle ,"
Journal of Monetary Economics ,
Elsevier, vol. 15(2), pages 145-161, March.
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Jermann, Urban J., 1998.
"Asset pricing in production economies ,"
Journal of Monetary Economics ,
Elsevier, vol. 41(2), pages 257-275, April.
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Gali, J., 1996.
"Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations? ,"
Working Papers
96-28, C.V. Starr Center for Applied Economics, New York University.
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Other versions:
Jordi Gali, 1996.
"Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations ,"
NBER Working Papers
5721, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted) Galí, Jordi, 1996.
"Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations? ,"
CEPR Discussion Papers
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[Downloadable!] (restricted) Jordi Gali, 1999.
"Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations? ,"
American Economic Review ,
American Economic Association, vol. 89(1), pages 249-271, March.
[Downloadable!] (restricted) Martin Lettau & Sydney C. Ludvigson, 2004.
"The Declining Equity Premium: What Role Does Macroeconomic Risk Play? ,"
2004 Meeting Papers
644, Society for Economic Dynamics.
[Downloadable!]
Other versions:
Martin Lettau & Sydney C. Ludvigson & Jessica A. Wachter, 2004.
"The Declining Equity Premium: What Role Does Macroeconomic Risk Play? ,"
NBER Working Papers
10270, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted) Lettau, Martin & Ludvigson, Sydney & Wachter, Jessica, 2006.
"The Declining Equity Premium: What Role Does Macroeconomic Risk Play? ,"
CEPR Discussion Papers
5519, C.E.P.R. Discussion Papers.
[Downloadable!] (restricted) Abel, Andrew B., 1999.
"Risk premia and term premia in general equilibrium ,"
Journal of Monetary Economics ,
Elsevier, vol. 43(1), pages 3-33, February.
[Downloadable!] (restricted)
Other versions: Olivier Blanchard & John Simon, 2001.
"The Long and Large Decline in U.S. Output Volatility ,"
Brookings Papers on Economic Activity ,
Economic Studies Program, The Brookings Institution, vol. 32(2001-1), pages 135-174.
[Downloadable!]
Andres Arias & Gary D. Hansen & Lee E. Ohanian, 2006.
"Why Have Business Cycle Fluctuations Become Less Volatile? ,"
NBER Working Papers
12079, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Other versions: Leduc, Sylvain & Sill, Keith, 2004.
"A quantitative analysis of oil-price shocks, systematic monetary policy, and economic downturns ,"
Journal of Monetary Economics ,
Elsevier, vol. 51(4), pages 781-808, May.
[Downloadable!] (restricted)
Other versions: Carmen Broto & Esther Ruiz, 2004.
"Estimation methods for stochastic volatility models: a survey ,"
Journal of Economic Surveys ,
Blackwell Publishing, vol. 18(5), pages 613-649, December.
[Downloadable!] (restricted)
Other versions: Neville Francis & Valerie A. Ramey, 2002.
"Is the Technology-Driven Real Business Cycle Hypothesis Dead? ,"
NBER Working Papers
8726, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Michele Boldrin & Lawrence J. Christiano & Jonas D. M. Fisher, 2000.
"Habit persistence, asset returns and the business cycle ,"
Staff Report
280, Federal Reserve Bank of Minneapolis.
[Downloadable!]
Other versions:
Michele Boldrin & Lawrence J. Christiano & Jonas D.M. Fisher, 1999.
"Habit persistence, asset returns and the business cycles ,"
Working Paper Series
WP-99-14, Federal Reserve Bank of Chicago.
Michele Boldrin & Lawrence J. Christiano & Jonas D. M. Fisher, 2001.
"Habit Persistence, Asset Returns, and the Business Cycle ,"
American Economic Review ,
American Economic Association, vol. 91(1), pages 149-166, March.
[Downloadable!] (restricted)
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