A Long-Run Risks Model of Asset Pricing with Fat Tails
WWe explore the effects of fat tails on the equilibrium implications of the long run risks model of asset pricing by introducing innovations with dampened power law to consumption and dividends growth processes. We estimate the structural parameters of the proposed model by maximum likelihood. We find that the homoskedastic model with fat tails leads to significant increase in implied risk premia and volatility of price-dividend ratio over the benchmark Gaussian model, but similar volatility of market return, expected risk free rate and its volatility.
|Date of creation:||Nov 2008|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (305) 348-2316
Fax: (305) 348-1524
Web page: http://casgroup.fiu.edu/Economics/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Geweke, John, 2001. "A note on some limitations of CRRA utility," Economics Letters, Elsevier, vol. 71(3), pages 341-345, June.
- Phillippe Weil, 1997.
"The Equity Premium Puzzle and the Risk-Free Rate Puzzle,"
Levine's Working Paper Archive
1833, David K. Levine.
- Weil, Philippe, 1989. "The equity premium puzzle and the risk-free rate puzzle," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 401-421, November.
- Philippe Weil, 1989. "The Equity Premium Puzzle and the Riskfree Rate Puzzle," NBER Working Papers 2829, National Bureau of Economic Research, Inc.
- Ravi Bansal & Amir Yaron, 2000.
"Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles,"
NBER Working Papers
8059, National Bureau of Economic Research, Inc.
- Ravi Bansal & Amir Yaron, 2004. "Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles," Journal of Finance, American Finance Association, vol. 59(4), pages 1481-1509, 08.
- Benoit Mandelbrot, 1963. "The Variation of Certain Speculative Prices," The Journal of Business, University of Chicago Press, vol. 36, pages 394.
- Bidarkota, Prasad V. & Dupoyet, Brice V., 2007.
"The impact of fat tails on equilibrium rates of return and term premia,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 31(3), pages 887-905, March.
- Prasad V. Bidarkota & Brice V. Dupoyet, 2004. "The Impact of Fat Tails on Equilibrium Rates of Return and Term Premia," Working Papers 0411, Florida International University, Department of Economics.
- Mehra, Rajnish & Prescott, Edward C., 1985.
"The equity premium: A puzzle,"
Journal of Monetary Economics,
Elsevier, vol. 15(2), pages 145-161, March.
- Khurshid M. Kiani & Prasad V. Bidarkota, 2004.
"On Business Cycle Asymmetries in G7 Countries,"
Oxford Bulletin of Economics and Statistics,
Department of Economics, University of Oxford, vol. 66(3), pages 333-351, 07.
- Ravi Bansal, 2007.
"Long-run risks and financial markets,"
Federal Reserve Bank of St. Louis, issue Jul, pages 283-300.
- Balke, Nathan S & Fomby, Thomas B, 1994.
"Large Shocks, Small Shocks, and Economic Fluctuations: Outliers in Macroeconomic Time Series,"
Journal of Applied Econometrics,
John Wiley & Sons, Ltd., vol. 9(2), pages 181-200, April-Jun.
- Nathan S. Balke & Thomas B. Fomby, 1991. "Large shocks, small shocks, and economic fluctuations: outliers in macroeconomic times series," Research Paper 9101, Federal Reserve Bank of Dallas.
- Mariano M. Croce & Martin Lettau & Sydney C. Ludvigson, 2007. "Investor Information, Long-Run Risk, and the Term Structure of Equity," NBER Working Papers 12912, National Bureau of Economic Research, Inc.
- Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, vol. 57(4), pages 937-69, July.
- Prasad V. Bidarkota & Brice V. Dupoyet & J. Huston McCulloch, 2005. "Asset Pricing with Incomplete Information under Stable Shocks," Working Papers 0514, Florida International University, Department of Economics.
- Liuren Wu, 2004.
"Dampened Power Law: Reconciling the Tail Behavior of Financial Security Returns,"
- Liuren Wu, 2006. "Dampened Power Law: Reconciling the Tail Behavior of Financial Security Returns," The Journal of Business, University of Chicago Press, vol. 79(3), pages 1445-1474, May.
- Ian W. Martin, 2013.
"Consumption-Based Asset Pricing with Higher Cumulants,"
Review of Economic Studies,
Oxford University Press, vol. 80(2), pages 745-773.
- Ian Martin, 2010. "Consumption-Based Asset Pricing with Higher Cumulants," NBER Working Papers 16153, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:fiu:wpaper:0810. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sheng Guo)
If references are entirely missing, you can add them using this form.