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Sources of Entropy in Representative Agent Models
Backus, David - 2011
preferences, habits, and jumps. The metrics describe the pricing kernel's dispersion (the entropy of the title) and dynamics (time … dependence, a measure of how entropy varies over different time horizons). We show how each model generates entropy and time … approximations -- clarifies the mechanisms underlying these models. It also reveals, in some cases, tension between entropy, which …
Persistent link: https://www.econbiz.de/10012461438
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Asset Return Dynamics under Bad Environment Good Environment Fundamentals
Bekaert, Geert - 2009
We introduce a "bad environment-good environment" technology for consumption growth in a consumption- based asset pricing model. Using the preference structure from Campbell and Cochrane (1999), the model generates realistic time-varying volatility, skewness and kurtosis in fundamentals while...
Persistent link: https://www.econbiz.de/10012463427
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The Long-Run Risks Model and Aggregate Asset Prices : An Empirical Assessment
Beeler, Jason - 2009
The long-run risks model of asset prices explains stock price variation as a response to persistent fluctuations in the mean and volatility of aggregate consumption growth, by a representative agent with a high elasticity of intertemporal substitution. This paper documents several empirical...
Persistent link: https://www.econbiz.de/10012463859
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Investor Information, Long-Run Risk, and the Term Structure of Equity
Croce, Mariano M. - 2007
We study the role of information in asset pricing models with long-run cash flow risk. When investors can distinguish short- from long-run consumption risks (full information), the model generates a sizable equity risk premium only if the equity term structure slopes up, contrary to the data. In...
Persistent link: https://www.econbiz.de/10012465744
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A Revealed Preference Analysis of Asset Pricing Under Recursive Utility
Epstein, Larry G. - 1993
This paper considers a representative agent model of asset prices based on a recursive utility specification. A constant elasticity of intertemporal substitution is assumed but the risk-preference component of utility is restricted only by qualitative, nonparametric regularity conditions. The...
Persistent link: https://www.econbiz.de/10012474418
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Margin-Based Asset Pricing and Deviations from the Law of One Price
Gârleanu, Nicolae - 2011
In a model with heterogeneous-risk-aversion agents facing margin constraints, we show how securities' required returns are characterized both by their betas and their margin requirements. Negative shocks to fundamentals make margin constraints bind, lowering risk-free rates and raising Sharpe...
Persistent link: https://www.econbiz.de/10012461880
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Modeling Financial Contagion Using Mutually Exciting Jump Processes
Aït-Sahalia, Yacine - 2010
Adverse shocks to stock markets propagate across the world, with a jump in one region of the world seemingly causing an increase in the likelihood of a different jump in another region of the world. To capture this effect mathematically, we introduce a model for asset return dynamics with a...
Persistent link: https://www.econbiz.de/10012462802
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The Cross-Section and Time-Series of Stock and Bond Returns
Koijen, Ralph S.J. - 2010
Value stocks have higher exposure to innovations in the nominal bond risk premium, which measures the markets' perception of cyclical variation in future output growth, than growth stocks. The ICAPM then predicts a value risk premium provided that good news about future output lowers the...
Persistent link: https://www.econbiz.de/10012462964
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Disasters implied by equity index options
Backus, David - 2009
We use prices of equity index options to quantify the impact of extreme events on asset returns. We define extreme events as departures from normality of the log of the pricing kernel and summarize their impact with high-order cumulants: skewness, kurtosis, and so on. We show that high-order...
Persistent link: https://www.econbiz.de/10012463409
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Confidence Risk and Asset Prices
Bansal, Ravi - 2009
In the data, asset prices exhibit large negative moves at frequencies of about 18 months. These large moves are puzzling as they do not coincide, nor are they followed by any significant moves in the real side of the economy. On the other hand, we find that measures of investor's uncertainty...
Persistent link: https://www.econbiz.de/10012463832