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Author: Yuming Li Publisher: ISBN: Category : Languages : en Pages : 56
Book Description
This paper presents a consumption-based asset pricing model to explain the equity premium and riskfree puzzles as well as the predictability of returns in the international equity markets. We find that because the model entails idiosyncratic consumption risk which is higher than the aggregate consumption risk, the model helps lower the investor risk aversion needed to explain the mean equity premiums. In addition, because the model also allows for habit formation that disentangles intertemporal substitution from investor risk aversion, the model can resolve the riskfree rate puzzle. Further, as the timevarying individual investor risk aversion and the re-distribution of wealth among heterogeneous investors are contributing factors to the time-varying equity premiums, the model explains larger portions of the long-horizon predictability for many countries' equity markets and the world market portfolio than the world representative-agent model. In contrast, the power utility model with or without idiosyncratic consumption risk fails to explain the level of the real riskfree rate or the predictability of returns.
Author: Yuming Li Publisher: ISBN: Category : Languages : en Pages : 56
Book Description
This paper presents a consumption-based asset pricing model to explain the equity premium and riskfree puzzles as well as the predictability of returns in the international equity markets. We find that because the model entails idiosyncratic consumption risk which is higher than the aggregate consumption risk, the model helps lower the investor risk aversion needed to explain the mean equity premiums. In addition, because the model also allows for habit formation that disentangles intertemporal substitution from investor risk aversion, the model can resolve the riskfree rate puzzle. Further, as the timevarying individual investor risk aversion and the re-distribution of wealth among heterogeneous investors are contributing factors to the time-varying equity premiums, the model explains larger portions of the long-horizon predictability for many countries' equity markets and the world market portfolio than the world representative-agent model. In contrast, the power utility model with or without idiosyncratic consumption risk fails to explain the level of the real riskfree rate or the predictability of returns.
Author: Julian Veil Publisher: GRIN Verlag ISBN: 3346385280 Category : Business & Economics Languages : en Pages : 22
Book Description
Seminar paper from the year 2021 in the subject Business economics - Investment and Finance, grade: 1,0, University of Frankfurt (Main) (Finanzen), language: English, abstract: This paper aims to explain the countercyclical behavior of the equity risk premium and the stock return volatility by introducing an external habit formation feature in the standard representative-agent consumption-based asset pricing model, in form of the so called “catching up with the Joneses” preferences. These preferences imply that the relative risk aversion of the agents in the economy is constant over time and varies across the agents, which generates an endogenous wealth process, that in turn creates a countercyclical behavior in the risk premium and the conditional stock return volatility. As the agents with lower risk aversion distribute a greater fraction of their wealth to risky assets, their wealth decreases relatively more in reaction to cyclical downturns, shifting the aggregate wealth towards more risk averse individuals. These more risk averse agents, however, demand a higher compensation for risk, leading to an increase of the aggregate equity risk premium in response to a fall in stock prices. One of the most studied topics in modern economics are the market mechanisms that lead to the determination of asset prices in an economy. The empirical research indicates that there is a link between the historically observed asset prices and macroeconomic developments. One of the most important observations are the countercyclical behavior of the equity risk premium and the stock return volatility, implying that the excess return of common stocks over the risk-free rate during business cycle troughs is significantly higher than during expansions.
Author: Douglas T. Breeden Publisher: ISBN: Category : Languages : en Pages :
Book Description
Following Part 1 of this article, which reviews late-1970s to 1990s classic derivations and tests of the consumption capital asset pricing model, here in Part 2 we review more recent developments, some of which are based on utility functions with non-time-separable preferences. Important second-generation consumption-based asset pricing advances are also reviewed, including models with habit formation and long-run risk. These models give large cyclical changes in relative risk aversion and risk premiums as well as lagged impacts of aggregate consumption changes on risk premiums. We review asset pricing with rare disasters and models focused on consumer spending on durables and real estate, as well as the fraction of spending financed by labor income. The second-generation models discussed have more free parameters and fit the empirical data better than did the first-generation consumption-based asset pricing models.
Author: Motohiro Yogo Publisher: ISBN: Category : Languages : en Pages : 43
Book Description
This article explains the high level and the countercyclical variation of the equity premium in a consumption-based asset pricing model with low large-scale risk aversion. Investors have gain-loss utility over consumption relative to slowly time-varying habit. Stocks deliver low returns in recessions when consumption falls below habit; investors therefore require a high premium for holding stocks. The model's conditional moment restrictions are tested on consumption and asset returns data. The empirical estimate of large-scale risk aversion is low, whereas the estimate of loss aversion agrees with prior experimental evidence.
Author: Mr.José M. Barrionuevo Publisher: International Monetary Fund ISBN: 1451843186 Category : Business & Economics Languages : en Pages : 46
Book Description
This paper presents a statistical and economic interpretation of the low and often economically implausible risk aversion estimates obtained for fixed income assets throughout the finance literature. For a statistical interpretation, Monte Carlo simulations are used to demonstrate that specification errors introduce a serious downward bias in parameter estimates derived from the standard asset pricing model. For an economic interpretation, an international version of the asset pricing model is presented. The model suggests that by reducing the effect of country specific disturbances, an international measure of consumption growth yields more accurate risk aversion estimates than a national measure. The results of asset pricing tests suggest that risk aversion estimates derived from models constructed for the international measures are economically plausible and close to each other across eight industrialized economies. These results are robust for several asset returns.
Author: George M. Korniotis Publisher: ISBN: Category : Languages : en Pages :
Book Description
This paper introduces a consumption-based capital asset pricing model (CCAPM) that combines undiversifiable income shocks and external habit formation. Using US state-level data, the paper provides realistic estimates for preference parameters when the external habit of the state investors is based on the consumption of the four Census regions. The model also implies four asset pricing factors: the cross-sectional means of consumption growth and habit growth (capturing national systematic risk) and the cross-sectional variances of consumption growth and habit growth (capturing regional systematic risk). This four-factor model has greater power in explaining expected returns than the CCAPM described in Breeden ().
Author: Olesya V. Grishchenko Publisher: ISBN: Category : Languages : en Pages : 33
Book Description
I present a generalized model that structurally nests both quot;catching up with the Jonesesquot; (external habit) and quot;time non-separablequot; (internal habit) preference specifications. The model's asset pricing implications are confronted with the observed aggregate US consumption and asset returns data to determine the relative importance of quot;catching up with the Jonesesquot; and internal habit formation. I show that long-horizon aggregate returns are more consistent with long-run habit as opposed to quot;catching up with the Jonesesquot; preferences. This result supports the findings of Parker and Julliard (2005) that the ultimate consumption risk explains more of the cross-sectional variation in stock returns.
Author: Melisso Boschi Publisher: ISBN: Category : Languages : en Pages : 30
Book Description
We develop a model of asset pricing assuming that investor's behavior is habit forming. The model predicts that the effect of consumption growth shocks on the risk premium depends on the business cycle phase of the economy. This empirical implication is tested with a Markov-switching VAR model on the US postwar economy.The results show that the response of the risk premium to shocks to consumption is not significantly different over the business cycle phases of the economy. We interpret this as evidence against the habit formation hypothesis of the investor's behavior.
Author: Yuming Li
Author: Yuming Li
Author: Julian Veil
Author: Douglas T. Breeden
Author: Motohiro Yogo
Author: Mr.José M. Barrionuevo
Author: George M. Korniotis
Author: Olesya V. Grishchenko
Author: Kjetil Storesletten
Author: Melisso Boschi
Author: John H. Cochrane