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Valuation Risk and Asset Pricing

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  • Rui Albuquerque
  • Martin S. Eichenbaum
  • Sergio Rebelo

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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18617.

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Date of creation: Dec 2012
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Handle: RePEc:nbr:nberwo:18617

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  1. Normandin, Michel & St-Amour, Pascal, 1996. "Substitution, Risk Aversion, Taste Shocks and Equity Premia," Cahiers de recherche 9606, Université Laval - Département d'économique.
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  12. Barro, Robert, 2006. "Rare Disasters and Asset Markets in the Twentieth Century," Scholarly Articles 3208215, Harvard University Department of Economics.
  13. Rietz, Thomas A., 1988. "The equity risk premium a solution," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 117-131, July.
  14. Lars Peter Hansen & John C. Heaton & Nan Li, 2008. "Consumption Strikes Back? Measuring Long-Run Risk," Journal of Political Economy, University of Chicago Press, vol. 116(2), pages 260-302, 04.
  15. Vasicek, Oldrich Alfonso, 1977. "Abstract: An Equilibrium Characterization of the Term Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(04), pages 627-627, November.
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  17. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
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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
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Cited by:
  1. 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.
  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. Pagel, Michaela, 2012. "Expectations-Based Reference-Dependent Preferences and Asset Pricing," MPRA Paper 47933, University Library of Munich, Germany.

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