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Valuation Risk and Asset Pricing

Author

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  • Albuquerque, Rui
  • Eichenbaum, Martin
  • Rebelo, Sérgio

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.

Suggested Citation

  • Albuquerque, Rui & Eichenbaum, Martin & Rebelo, Sérgio, 2012. "Valuation Risk and Asset Pricing," CEPR Discussion Papers 9262, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:9262
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    References listed on IDEAS

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    Cited by:

    1. repec:bis:bisbps:95 is not listed on IDEAS
    2. Albuquerque, Rui & Eichenbaum, Martin & Papanikolaou, Dimitris & Rebelo, Sergio, 2015. "Long-run bulls and bears," Journal of Monetary Economics, Elsevier, vol. 76(S), pages 21-36.
    3. Pagel, Michaela, 2012. "Expectations-Based Reference-Dependent Preferences and Asset Pricing," MPRA Paper 47933, University Library of Munich, Germany.
    4. repec:col:000129:016212 is not listed on IDEAS
    5. 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.
    6. Daniel L. Greenwald & Martin Lettau & Sydney C. Ludvigson, 2014. "Origins of Stock Market Fluctuations," NBER Working Papers 19818, National Bureau of Economic Research, Inc.
    7. Stijn Claessens & M. Ayhan Kose, 2017. "Asset prices and macroeconomic outcomes: A survey," CAMA Working Papers 2017-76, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    8. Pancrazi, Roberto, 2014. "How beneficial was the Great Moderation after all?," Journal of Economic Dynamics and Control, Elsevier, vol. 46(C), pages 73-90.
    9. Burkhard Heer & Alfred Maussner & Bernd Suessmuth, 2018. "Cyclical Asset Returns in the Consumption and Investment Goods Sector," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 28, pages 51-70, April.
    10. Mohsan Bilal, 2017. "Zeroing in: Asset Pricing at the Zero Lower Bound," 2017 Meeting Papers 377, Society for Economic Dynamics.
    11. repec:eee:jfinec:v:127:y:2018:i:2:p:248-263 is not listed on IDEAS

    More about this item

    Keywords

    bond yields; Equity premium; risk premium;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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