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Long Run Risk Through Consumption Smoothing
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Book Synopsis Long-Run Risk Through Consumption Smoothing by : Georg Kaltenbrunner
Download or read book Long-Run Risk Through Consumption Smoothing written by Georg Kaltenbrunner and published by . This book was released on 2011 with total page 67 pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine how long-run consumption risk arises endogenously in a standard production economy model where the representative agent has Epstein-Zin preferences. Even when technology growth is i.i.d., optimal consumption smoothing induces highly persistent time-variation in expected consumption growth (long-run risk). This increases the price of risk when investors prefer early resolution of uncertainty, and the model can then account for the low volatility of consumption growth and the high price of risk with a low coefficient of relative risk aversion. The asset price implications of endogenous long-run risk depends crucially on the persistence of technology shocks and investors preference for the timing of resolution of uncertainty. We use the time-series of consumption growth and the cross-section of stock returns to evaluate different parameterizations of the model.
Book Synopsis Preferences, Consumption Smoothing, and Risk Premia by : Martin Lettau
Download or read book Preferences, Consumption Smoothing, and Risk Premia written by Martin Lettau and published by . This book was released on 1997 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Temporal Risk Aversion and Asset Prices by : Skander Joannes Van den Heuvel
Download or read book Temporal Risk Aversion and Asset Prices written by Skander Joannes Van den Heuvel and published by . This book was released on 2008 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Mean Reversion and Consumption Smoothing by : Fischer Black
Download or read book Mean Reversion and Consumption Smoothing written by Fischer Black and published by . This book was released on 1989 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt: Using a simple conventional model with additive separable utility and constant elasticity, we can explain mean reversion and consumption smoothing. The model uses the price of risk and wealth as state variables, but has only one stochastic variable. The price of risk rises temporarily as wealth falls. We also distinguish between risk aversion and the consumption elasticity of marginal utility. We can use the model to match estimates of the average values of consumption volatility, wealth volatility, mean reversion, the growth rate of consumption, the real interest rate, and the market risk premium.
Book Synopsis Long-run Risk, Durable Consumption Growth and Estimation of Risk Aversion by : Ziemowit Bednarek
Download or read book Long-run Risk, Durable Consumption Growth and Estimation of Risk Aversion written by Ziemowit Bednarek and published by . This book was released on 2015 with total page 19 pages. Available in PDF, EPUB and Kindle. Book excerpt: We present a durable consumption-based asset pricing model with Epstein-Zin preferences and the pricing kernel accommodating the long-run consumption risk. Consumption growth includes a small predictable component as in Bansal and Yaron (2004). The model is estimated with simple econometric techniques once we linearize it around a special case of the elasticity of inter- and intra-temporal substitution equal to one. After including the long-run consumption growth, the estimates of the model parameters become much more realistic and the fit closer to the data than for the case of the contemporaneous consumption growth. For example, the estimate of risk aversion falls from around 200 to 10, and the R2 increases from around 30% to 60%.
Book Synopsis Financial Markets and the Real Economy by : John H. Cochrane
Download or read book Financial Markets and the Real Economy written by John H. Cochrane and published by Now Publishers Inc. This book was released on 2005 with total page 117 pages. Available in PDF, EPUB and Kindle. Book excerpt: Financial Markets and the Real Economy reviews the current academic literature on the macroeconomics of finance.
Book Synopsis Asset Pricing with Left-Skewed Long-Run Risk in Durable Consumption by : Wei Yang
Download or read book Asset Pricing with Left-Skewed Long-Run Risk in Durable Consumption written by Wei Yang and published by . This book was released on 2014 with total page 55 pages. Available in PDF, EPUB and Kindle. Book excerpt: I document that durable consumption growth is persistent and predicted by the price-dividend ratio. This provides strong and direct evidence for the existence of a highly persistent expected component. I also document robust evidence that durable consumption growth is left skewed and exhibits time-varying volatility. Based on these empirical properties, I model durable consumption growth as containing a persistent expected component and driven by shocks with counter-cyclical volatility. I embed the durable consumption growth dynamics and random walk nondurable consumption growth in nonseparable Epstein-Zin preferences, and model dividend growth as a levered claim on the expected component of durable consumption growth. The resulting model can explain a number of asset pricing phenomena, including pro-cyclical price-dividend ratios, large and counter-cyclical equity premia and stock return volatilities, low and smooth risk-free rates, and the predictability of stock returns. The model also generates the volatility feedback effect and an upward sloping term structure of real bond yields.
Book Synopsis A Unified Theory of Consumption Smoothing and Asset Returns in an Efficient Market by : Ralph Chami
Download or read book A Unified Theory of Consumption Smoothing and Asset Returns in an Efficient Market written by Ralph Chami and published by . This book was released on 1998 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We provide an explicit solution to a standard Cash-in-Advance model with production that provides the relationship between consumption smoothing and the excess volatility of asset returns. Preferences are represented by a constant relative risk aversion utility function, while the production technology is given by a Cobb-Douglas function with partial depreciation of the capital stock. We find that the growth rate of consumption is negatively autocorrelated, and depends on the marginal return on investment, as well as, on the change in money growth. Moreover, the firm finds it optimal to adjust its real stock return to the consumer's intertemporal rate of substitution in every state of the world which, in turn, is dependent on consumption growth. Consequently, stock returns are also negatively autocorrelated, and are negatively related to the change in the money growth. Our simulations indicate that the standard deviation of consumption is significantly less than that of output for both CRRA and logarithmic preferences, which also contradicts Deaton's Paradox. Our result is driven by the fact that stock returns are able to vary over time in response to changes in the consumer's intertemporal rate of substitution. Moreover, we provide discussions and simulations of our solution that highlight the significant differences with the existing work in the literature.
Book Synopsis Essays on Consumption Smoothing and Risk Sharing by : Yingchun Liu
Download or read book Essays on Consumption Smoothing and Risk Sharing written by Yingchun Liu and published by . This book was released on 2002 with total page 76 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Precautionary Saving and Consumption Smoothing Across Time and Possibilities by : Miles S. Kimball
Download or read book Precautionary Saving and Consumption Smoothing Across Time and Possibilities written by Miles S. Kimball and published by . This book was released on 1992 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines how aversion to risk and intertemporal substitution determine the strength of the precautionary saving motive in a two-period model with Kreps-Porteus preferences. For small risks, we derive a measure of the strength of the precautionary saving motive which generalizes to these more general preferences the concept of "prudence" introduced by Kimball [l990b] to these more general preferences. For large risks, we show that decreasing absolute risk aversion guarantees that the precautionary saving motive is stronger than risk aversion, regardless of the elasticity of intertemporal substitution. Holding risk preferences fixed, the extent to which the precautionary saving motive is stronger than risk aversion increases with the elasticity of intertemporal substitution. We derive sufficient conditions for the strength of the precautionary saving motive to decline with wealth and for a change in risk preferences alone to increase the strength of the precautionary saving motive.
Book Synopsis Equilibrium Theory in Infinite Dimensional Spaces by : M. Ali Khan
Download or read book Equilibrium Theory in Infinite Dimensional Spaces written by M. Ali Khan and published by Springer Science & Business Media. This book was released on 2013-03-09 with total page 441 pages. Available in PDF, EPUB and Kindle. Book excerpt: Apart from the underlying theme that all the contributions to this volume pertain to models set in an infinite dimensional space, they differ on many counts. Some were written in the early seventies while others are reports of ongoing research done especially with this volume in mind. Some are surveys of material that can, at least at this point in time, be deemed to have attained a satisfactory solution of the problem, while oth ers represent initial forays into an original and novel formulation. Some furnish alternative proofs of known, and by now, classical results, while others can be seen as groping towards and exploring formulations that have not yet reached a definitive form. The subject matter also has a wide leeway, ranging from solution concepts for economies to those for games and also including representation of preferences and discussion of purely mathematical problems, all within the rubric of choice variables belonging to an infinite dimensional space, interpreted as a commodity space or as a strategy space. Thus, this is a collective enterprise in a fairly wide sense of the term and one with the diversity of which we have interfered as little as possible. Our motivation for bringing all of this work under one set of covers was severalfold.
Book Synopsis Cross-country Consumption Risk Sharing, a Long-run Perspective by : Mr.Zhaogang Qiao
Download or read book Cross-country Consumption Risk Sharing, a Long-run Perspective written by Mr.Zhaogang Qiao and published by International Monetary Fund. This book was released on 2010-03-01 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper estimates an empirical nonstationary panel regression model that tests long-run consumption risk sharing across a sample of OECD and emerging market (EM) countries. This is in contrast to the existing literature on consumption risk sharing, which is mainly about risks at business cycle frequency. Since our methodology focuses on identifying cointegrating relationships while allowing for arbitrary short-run dynamics, we can obtain a consistent estimate of long-run risk sharing while disregarding any short-run nuisance factors. Our results show that long-run risk sharing in OECD countries increased more than that in EM countries during the past two decades.
Book Synopsis Long-Run Stockholder Consumption Risk and Asset Returns by : Annette Vissing-Jorgensen
Download or read book Long-Run Stockholder Consumption Risk and Asset Returns written by Annette Vissing-Jorgensen and published by . This book was released on 2013 with total page 71 pages. Available in PDF, EPUB and Kindle. Book excerpt: We provide new evidence on the success of long-run risks in asset pricing by focusing on the risks borne by stockholders. Exploiting micro-level household consumption data, we show that long-run stockholder consumption risk better captures cross-sectional variation in average asset returns than aggregate or non-stockholder consumption risk, and provides more plausible economic magnitudes. We find that risk aversion estimates around 10 can match observed risk premia for the wealthiest stockholders across sets of test assets that include the 25 Fama and French size and value portfolios, the market portfolio, bond portfolios, and the entire cross-section of stocks.
Book Synopsis Ambiguity, Long-Run Risk, and Asset Prices by : Wale Dare
Download or read book Ambiguity, Long-Run Risk, and Asset Prices written by Wale Dare and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We study the U.S. equity market via a representative agent model with smooth ambiguity preference over consumption and leisure. Equilibrium wage and consumption growth processes are specified as Gaussian processes. The conditional mean of the consumption process alternates between a high and a low state, while the conditional mean of the wage process fluctuates over time. We show that the model is able to generate enough equity risk premia to match the level observed in historical data without making unreasonably high assumptions about the agent's risk aversion.
Book Synopsis Capital Mobility by : Leonardo Leiderman
Download or read book Capital Mobility written by Leonardo Leiderman and published by Cambridge University Press. This book was released on 1994-07-14 with total page 400 pages. Available in PDF, EPUB and Kindle. Book excerpt: This edited volume examines capital mobility in both industrialised and developing countries.
Book Synopsis NBER Macroeconomics Annual 1992 by : Olivier Blanchard
Download or read book NBER Macroeconomics Annual 1992 written by Olivier Blanchard and published by MIT Press. This book was released on 1992 with total page 312 pages. Available in PDF, EPUB and Kindle. Book excerpt: This is the seventh in a series of annuals from the National Bureau of Economic Research that are designed to stimulate research on problems in applied economics, to bring frontier theoretical developments to a wider audience, and to accelerate the interaction between analytical and empirical research in macroeconomics. Contents What Shall We Do Today? Goals and Signposts in the Operation of Monetary Policy, Ben S. Bernanke and Frederic S. Mishkin - A Tale of Two Cities: Factor Accumulation and Technical Change in Hong Kong and Singapore, Alwyn Young - International Trade and the Wage Structure, Steven J. Davis - Imperfect Information and Macroeconomic Analysis, Joseph E. Stiglitz and Bruce Greenwald - Asset Pricing Lessons for Macroeconomics, Lars P. Hansen and John H. Cochrane - Postmortem on the Debt Crisis, Daniel Cohen
Book Synopsis Consumption Heterogeneity and Long Run Risk by : Victoria Galsband
Download or read book Consumption Heterogeneity and Long Run Risk written by Victoria Galsband and published by . This book was released on 2008 with total page 25 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper establishes a surprising and robust empirical similarity between short-run heterogeneous consumption and long-term consumption growth risk models. The models not only deliver a similar fit on a given set of portfolios, their actual pricing errors are also highly correlated. In addition, we find that consumption dispersion is a robust predictor of the transitory component in aggregate consumption growth. To interpret these findings, we propose a model in which aggregate uncertainty is a function of idiosyncratic uncertainty and only long-term consumption growth risk is priced. An implication of this being that consumption dispersion is priced empirically not because markets are necessarily incomplete but because investors disagree in the short-run about their common long-term consumption prospects.
