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Journal of Finance Vol. 71 No. 6 2016

Valuation Risk and Asset Pricing

Rui Albuquerque; Martin Eichenbaum; VICTOR XI LUO; Sergio Rebelo1,2,3,4

1 Boston College · 2 Center for Economic and Policy Research · 3 Northwestern University · 4 Federal Reserve Bank of Chicago

Abstract

Standard representative‐agent models fail to account for the weak correlation between stock returns and measurable fundamentals, such as consumption and output growth. This failing, which underlies virtually all modern asset pricing puzzles, arises because these models load all uncertainty onto the supply side of the economy. We propose a simple theory of asset pricing in which demand shocks play a central role. These shocks give rise to valuation risk that allows the model to account for key asset pricing moments, such as the equity premium, the bond term premium, and the weak correlation between stock returns and fundamentals.

DOI
10.1111/jofi.12437
Volume
71
Issue
6
Pages
2861-2904
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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