Your search
15 resources
-
FT50 UTD24 A*
This paper proposes a consumption-based model that accounts for many features of the nominal term structure of interest rates. The driving force behind the model is a time-varying price of risk generated by external habit. Nominal bonds depend on past consumption growth through habit and on expected inflation. When calibrated to data on consumption, inflation, and the aggregate market, the model produces realistic means and volatilities of bond yields and accounts for the expectations puzzle. The model also captures the high equity premium and excess stock market volatility.
-
FT50 UTD24 A*
ABSTRACT Why is the equity premium so high, and why are stocks so volatile? Why are stock returns in excess of government bill rates predictable? This paper proposes an answer to these questions based on a time-varying probability of a consumption disaster. In the model, aggregate consumption follows a normal distribution with low volatility most of the time, but with some probability of a consumption realization far out in the left tail. The possibility of this poor outcome substantially increases the equity premium, while time-variation in the probability of this outcome drives high stock market volatility and excess return predictability.
-
FT50 UTD24 A*
-
FT50 UTD24 A*
ABSTRACT We solve the portfolio problem of a long-run investor when the term structure is Gaussian and when the investor has access to nominal bonds and stock. We apply our method to a three-factor model that captures the failure of the expectations hypothesis. We extend this model to account for time-varying expected inflation, and estimate the model with both inflation and term structure data. The estimates imply that the bond portfolio of a long-run investor looks very different from the portfolio of a mean-variance optimizer. In particular, time-varying term premia generate large hedging demands for long-term bonds.
-
FT50 UTD24 A*
Why do value stocks have higher average returns than growth stocks, despite having lower risk? Why do these stocks exhibit positive abnormal performance, while growth stocks exhibit negative abnormal performance? This paper offers a rare-event-based explanation that can also account for the high equity premium and volatility of the aggregate market. The model explains other puzzling aspects of the data, such as joint patterns in time-series predictablity of aggregate market and value and growth returns, long periods in which growth outperforms value, and the association between positive skewness and low realized returns.
-
FT50 UTD24 A*
Empirical studies demonstrate striking patterns in stock returns related to scheduled macroeconomic announcements. A large proportion of the total equity premium is realized on days with macroeconomic announcements. The relation between market betas and expected returns is far stronger on announcement days as compared with nonannouncement days. Finally, these results hold for fixed-income investments as well as for stocks. We present a model in which agents learn the probability of an adverse economic state on announcement days. We show that the model quantitatively accounts for the empirical findings. Evidence from options data provides support for the model’s mechanism.
-
FT50 UTD24 A*
The equity premium — the expected return on the aggregate stock market less the government bill rate – is of central importance to the portfolio allocation of individuals, to the investment decisions of firms, and to model calibration and testing. This quantity is usually estimated from the sample average excess return. We propose an alternative estimator, based on maximum likelihood, that takes into account information contained in dividends and prices. Applied to the postwar sample, our method leads to an economically significant reduction from 6.4% to 5.1%. Simulation results show that our method produces more reliable estimates under a wide range of specifications.
Explore
Journals
-
Journal of Finance
(5)
-
JF-2001
(1)
- JF-2001-08 (1)
-
JF-2005
(1)
- JF-2005-02 (1)
-
JF-2007
(1)
- JF-2007-02 (1)
-
JF-2013
(1)
- JF-2013-06 (1)
-
JF-2018
(1)
- JF-2018-10 (1)
-
JF-2001
(1)
-
Journal of Financial Economics
(3)
-
JFE-2006
(1)
- JFE-2006-02 (1)
-
JFE-2011
(1)
- JFE-2011-07 (1)
-
JFE-2017
(1)
- JFE-2017-09 (1)
-
JFE-2006
(1)
-
Quarterly Journal of Economics
(1)
-
QJE-2024
(1)
- QJE-2024-05 (1)
-
QJE-2024
(1)
-
Review of Financial Studies
(6)
- RFS-2008 (1)
-
RFS-2010
(1)
- RFS-2010-11 (1)
-
RFS-2016
(1)
- RFS-2016-05 (1)
-
RFS-2018
(1)
- RFS-2018-12 (1)
-
RFS-2019
(1)
- RFS-2019-04 (1)
-
RFS-2022
(1)
- RFS-2022-05 (1)