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covariance matrix implied by the long-run risk model of Bansal and Yaron (2004). Comparing the optimal allocations of investors … using the longrun risk VAR versus an unrestricted reduced-form VAR reveals stark differences in portfolio strategies. Long …-run risk investors are quite conservative relative to reduced-form investors due to intertemporal hedging concerns. Despite the …
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This paper analyzes how the combination of borrowing constraints and idiosyncratic risk affects the equity premium in … idiosyncratic risk increases the equity premium by 70 percent, which means that the mechanism described in Constantinides, Donaldson … the zero-borrowing constraint is a lot weaker. More surprisingly, when I introduce idiosyncratic labor income risk in an …
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We study the effects of permanent and temporary income shocks on precautionary saving and investment in a "store-or-sow" model of growth. High volatility of permanent shocks results in high precautionary saving in the safe asset and low investment, or a "volatility trap." Namely, big savers...
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