Valuation risk revalued

Oliver de Groot; Alexander W.  Richter; Nathaniel A. Throckmorton

Valuation risk revalued

Oliver de Groot, Alexander W. Richter, Nathaniel A. Throckmorton

Research output: Working paper › Discussion paper

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.

Original language	English
Place of Publication	St Andrews
Publisher	University of St Andrews
Number of pages	28
Publication status	Published - 17 Dec 2018

Publication series

Name	School of Economics and Finance Discussion Paper
Publisher	University of St Andrews
No.	1805
ISSN (Print)	0962-4031
ISSN (Electronic)	2055-303X

Keywords

Epstein-Zin utility
Valuation risk
Equity premium puzzle
Risk-free rate puzzle

Access to Document

deGroot_EconDiscPap_1805
Copyright (c) 2018 the authors
Final published version, 467 KB

Cite this

@techreport{2f22c2ee66e6461d901879593b31624e,

title = "Valuation risk revalued",

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.",

keywords = "Epstein-Zin utility, Valuation risk, Equity premium puzzle, Risk-free rate puzzle",

author = "{de Groot}, Oliver and Richter, {Alexander W.} and Throckmorton, {Nathaniel A.}",

year = "2018",

month = dec,

day = "17",

language = "English",

series = "School of Economics and Finance Discussion Paper",

publisher = "University of St Andrews",

number = "1805",

type = "WorkingPaper",

institution = "University of St Andrews",

}

TY - UNPB

T1 - Valuation risk revalued

AU - de Groot, Oliver

AU - Richter, Alexander W.

AU - Throckmorton, Nathaniel A.

PY - 2018/12/17

Y1 - 2018/12/17

N2 - 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.

AB - 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.

KW - Epstein-Zin utility

KW - Valuation risk

KW - Equity premium puzzle

KW - Risk-free rate puzzle

UR - https://ideas.repec.org/p/san/wpecon/1805.html

M3 - Discussion paper

T3 - School of Economics and Finance Discussion Paper

BT - Valuation risk revalued

PB - University of St Andrews

CY - St Andrews

ER -

Valuation risk revalued

Abstract

Publication series

Keywords

Access to Document

Other files and links

Fingerprint

Cite this