TY - JOUR
T1 - Macroeconomic tail risks and asset prices
AU - Schreindorfer, David
N1 - Publisher Copyright:
© The Author(s) 2019.
PY - 2020
Y1 - 2020
N2 - I document that dividend growth and returns on the aggregate U.S. stock market are more correlated with consumption growth in bad economic times. In a consumption-based asset pricing model with a generalized disappointment-averse investor and small, IID consumption shocks, this feature results in a realistic equity premium despite low risk aversion. The model is consistent with the main facts about stock market risk premiums inferred from equity index options, remains tightly parameterized, and allows for analytical solutions for asset prices. An extension with non-IID dynamics accounts for excess volatility and return predictability, while preserving the model’s consistency with option moments.
AB - I document that dividend growth and returns on the aggregate U.S. stock market are more correlated with consumption growth in bad economic times. In a consumption-based asset pricing model with a generalized disappointment-averse investor and small, IID consumption shocks, this feature results in a realistic equity premium despite low risk aversion. The model is consistent with the main facts about stock market risk premiums inferred from equity index options, remains tightly parameterized, and allows for analytical solutions for asset prices. An extension with non-IID dynamics accounts for excess volatility and return predictability, while preserving the model’s consistency with option moments.
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U2 - 10.1093/RFS/HHZ105
DO - 10.1093/RFS/HHZ105
M3 - Article
AN - SCOPUS:85102108053
SN - 0893-9454
VL - 33
SP - 3541
EP - 3582
JO - Review of Financial Studies
JF - Review of Financial Studies
IS - 8
ER -