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Recursive preferences, long-run risks, and stock valuation

Author

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  • Claude Bergeron

    (School of Business Administration, Teluq University)

Abstract

In this note, we develop a stock valuation model with recursive preferences and long-run risks. The model is based on the Epstein and Zin (1989, 1991) and Weil (1989) recursive utility framework. Our main result indicates that the intrinsic value of a stock is negatively related to (i) the long-run covariance between dividends and aggregate consumption, and (ii) the long-run covariance between dividends and market returns. This theoretical finding suggests that the sensitivity of dividends to market returns and aggregate consumption affects the long-run risk of a firm and its equity value.

Suggested Citation

  • Claude Bergeron, 2019. "Recursive preferences, long-run risks, and stock valuation," Economics Bulletin, AccessEcon, vol. 39(2), pages 996-1004.
    • Handle: RePEc:ebl:ecbull:eb-19-00289
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    References listed on IDEAS

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    Cited by:

    1. Claude Bergeron & Tov Assogbavi & Jean-pierre Gueyie, 2020. "Conditional capital asset pricing model, long-run risk, and stock valuation," Economics Bulletin, AccessEcon, vol. 40(1), pages 77-86.

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    Keywords

    Recursive preferences; Asset pricing; Long-run risk; Stock valuation;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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