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Asset Pricing with Persistence Risk

Author

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  • Daniel Andrei
  • Michael Hasler
  • Alexandre Jeanneret

Abstract

Persistence risk is an endogenous source of risk that arises when a rational agent learns about the length of business cycles. Persistence risk is positive during recessions and negative during expansions. This asymmetry, which solely results from learning about persistence, causes expected returns, return volatility, and the price of risk to rise during recessions. Persistence risk predicts future excess returns, particularly at 3- to 7-year horizons. Its predictability is strongest around business-cycle peaks and troughs. We confirm the model’s predictions in the data and provide evidence that persistence risk is priced in financial markets.Received October 13, 2017; editorial decision September 19, 2018 by Editor Stijn Van Nieuwerburgh. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Daniel Andrei & Michael Hasler & Alexandre Jeanneret, 2019. "Asset Pricing with Persistence Risk," The Review of Financial Studies, Society for Financial Studies, vol. 32(7), pages 2809-2849.
    • Handle: RePEc:oup:rfinst:v:32:y:2019:i:7:p:2809-2849.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhy121
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    Cited by:

    1. Hansen, Lars Peter & Sargent, Thomas J., 2021. "Macroeconomic uncertainty prices when beliefs are tenuous," Journal of Econometrics, Elsevier, vol. 223(1), pages 222-250.
    2. Liu, Liu, 2022. "Learning about the persistence of recessions under ambiguity aversion," Finance Research Letters, Elsevier, vol. 47(PA).
    3. Mykola Babiak & Roman Kozhan, 2021. "Growth Uncertainty, Rational Learning, and Option Prices," CERGE-EI Working Papers wp682, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    4. Lars Peter Hansen, 2021. "Uncertainty Spillovers for Markets and Policy," Annual Review of Economics, Annual Reviews, vol. 13(1), pages 371-396, August.
    5. Pohl, Walter & Schmedders, Karl & Wilms, Ole, 2021. "Asset pricing with heterogeneous agents and long-run risk," Journal of Financial Economics, Elsevier, vol. 140(3), pages 941-964.
    6. Kroencke, Tim A., 2022. "Recessions and the stock market," Journal of Monetary Economics, Elsevier, vol. 131(C), pages 61-77.

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