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Volatility, the Macroeconomy and Asset Prices

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  • Ravi Bansal
  • Dana Kiku
  • Ivan Shaliastovich
  • Amir Yaron

Abstract

We show that volatility movements have first-order implications for consumption dynamics and asset prices. Volatility news affects the stochastic discount factor and carries a separate risk premium. In the data, volatility risks are persistent and are strongly correlated with discount-rate news. This evidence has important implications for the return on aggregate wealth and the cross-sectional differences in risk premia. Estimation of our volatility risks based model yields an economically plausible positive correlation between the return to human capital and equity, while this correlation is implausibly negative when volatility risk is ignored. Our model setup implies a dynamics capital asset pricing model (DCAPM) which underscores the importance of volatility risk in addition to cash-flow and discount-rate risks. We show that our DCAPM accounts for the level and dispersion of risk premia across book-to-market and size sorted portfolios, and that equity portfolios carry positive volatility-risk premia.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18104.

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Date of creation: May 2012
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Publication status: published as “Volatility, the Macroeconomy and Asset Prices” (Dana Kiku, Ivan Shaliastovich, and Amir Yaron) Forthcoming, Journal of Finance
Handle: RePEc:nbr:nberwo:18104

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References

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  1. Philippe Weil, 1989. "The Equity Premium Puzzle and the Riskfree Rate Puzzle," NBER Working Papers 2829, National Bureau of Economic Research, Inc.
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  18. Ravi Bansal & Robert Dittmar & Dana Kiku, 2007. "Cointegration and Consumption Risks in Asset Returns," NBER Working Papers 13108, National Bureau of Economic Research, Inc.
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Cited by:
  1. Campbell, John Y. & Giglio, Stefano & Polk, Christopher, 2013. "Hard Times," Scholarly Articles 12172786, Harvard University Department of Economics.
  2. Nikolai Roussanov, 2010. "Composition of Wealth, Conditioning Information, and the Cross-Section of Stock Returns," NBER Working Papers 16073, National Bureau of Economic Research, Inc.
  3. Fung, Ka Wai Terence & Lau, Chi Keung Marco & Chan, Kwok Ho, 2014. "The conditional equity premium, cross-sectional returns and stochastic volatility," Economic Modelling, Elsevier, vol. 38(C), pages 316-327.
  4. Max Gillman & Michal Kejak & Michal Pakos, 2014. "Learning about Rare Disasters: Implications for Consumptions and Asset Prices," CEU Working Papers 2014_2, Department of Economics, Central European University.
  5. Max Gillman & Michal Kejak & Michal Pakos, 2014. "Learning about Disaster Risk: Joint Implications for Consumption and Asset Prices," CERGE-EI Working Papers wp507, The Center for Economic Research and Graduate Education - Economic Institute, Prague.

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