High Aversion to Stochastic Time Preference Shocks and Counterfactual Long-Run Risk in the Albuquerque et al. Valuation Risk Model

Does valuation risk induced by stochastic time preferences explain the equity premium puzzle as proposed by Albuquerque et al. (2016)? This explanation of the equity premium has several challenges. First, the valuation risk model implies extreme preference for early resolution of uncertainty and extreme aversion to valuation risk (which becomes infinite as elasticity of intertemporal substitution approaches one). Second, the model has a significant long-run risk component that counterfactually implies that consumption and dividend growth are highly persistent and predictable. Finally, I find no evidence that equity prices predict future risk-free rates as predicted by the baseline valuation risk model