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Valuation risk revalued

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deGroot_EconDiscPap_1805.pdf (467.4Kb)
Date
17/12/2018
Author
de Groot, Oliver
Richter, Alexander W.
Throckmorton, Nathaniel A.
Keywords
Epstein-Zin utility
Valuation risk
Equity premium puzzle
Risk-free rate puzzle
HG Finance
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Abstract
This paper shows the recent success of valuation risk (time-preference shocks in Epstein- Zin utility) in resolving asset pricing puzzles rests sensitively on an undesirable asymptote that occurs because the preference specification fails to satisfy a key restriction on the weights in the Epstein-Zin time-aggregator. In a Bansal-Yaron long-run risk model, our revised valuation risk specification that satisfies the restriction provides a superior empirical fit. The results also show that valuation risk no longer has a major role in matching the mean equity premium and risk-free rate but is crucial for matching the volatility and autocorrelation of the risk-free rate.
Citation
de Groot , O , Richter , A W & Throckmorton , N A 2018 ' Valuation risk revalued ' School of Economics and Finance Discussion Paper , no. 1805 , University of St Andrews , St Andrews .
ISSN
0962-4031
Type
Working or discussion paper
Rights
Copyright (c) 2018 the authors
Collections
  • University of St Andrews Research
URL
https://ideas.repec.org/p/san/wpecon/1805.html
URI
http://hdl.handle.net/10023/16716

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