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40
Consumption Strikes Back?: Measuring Long Run Risk, Unpublished working paper
, 2006
"... We characterize and measure a longterm riskreturn tradeoff for the valuation of cash flows exposed to fluctuations in macroeconomic growth. This tradeoff features risk prices of cash flows that are realized far into the future but continue to be reflected in asset values. We apply this analysis ..."
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Cited by 107 (13 self)
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We characterize and measure a longterm riskreturn tradeoff for the valuation of cash flows exposed to fluctuations in macroeconomic growth. This tradeoff features risk prices of cash flows that are realized far into the future but continue to be reflected in asset values. We apply this analysis to claims on aggregate cash flows and to cash flows from value and growth portfolios by imputing values to the longrun dynamic responses of cash flows to macroeconomic shocks. We explore the sensitivity of our results to features of the economic valuation model and of the model cash flow dynamics. I.
Expected stock returns and variance risk premia, working paper
, 2008
"... Motivated by the implications from a stylized selfcontained general equilibrium model incorporating the effects of timevarying economic uncertainty, we show that the difference between implied and realized variation, or the variance risk premium, is able to explain a nontrivial fraction of the ti ..."
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Cited by 48 (1 self)
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Motivated by the implications from a stylized selfcontained general equilibrium model incorporating the effects of timevarying economic uncertainty, we show that the difference between implied and realized variation, or the variance risk premium, is able to explain a nontrivial fraction of the time series variation in post 1990 aggregate stock market returns, with high (low) premia predicting high (low) future returns. Our empirical results depend crucially on the use of “modelfree, ” as opposed to BlackScholes, options implied volatilities, along with accurate realized variation measures constructed from highfrequency intraday, as opposed to daily, data. The magnitude of the predictability is particularly striking at the intermediate quarterly return horizon, where it easily dominates that afforded by other popular predictor variables, like the P/E ratio, the default spread, and the consumptionwealth ratio (CAY).
Was There a Nasdaq Bubble in the Late 1990s?
, 2004
"... Not necessarily. The fundamental value of a firm increases with uncertainty about average future profitability, and this uncertainty was unusually high in the late 1990s. We calibrate a stock valuation model that includes this uncertainty, and compute the level of uncertainty that is needed to match ..."
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Cited by 35 (7 self)
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Not necessarily. The fundamental value of a firm increases with uncertainty about average future profitability, and this uncertainty was unusually high in the late 1990s. We calibrate a stock valuation model that includes this uncertainty, and compute the level of uncertainty that is needed to match the observed Nasdaq valuations at their peak. This uncertainty seems plausible because it matches not only the high level but also the high volatility of Nasdaq stock prices. We also show that uncertainty about average profitability has the biggest effect on stock prices when the equity premium is low.
The empirical riskreturn relation: a factor analysis approach
, 2007
"... Existing empirical literature on the riskreturn relation uses a relatively small amount of conditioning information to model the conditional mean and conditional volatility of excess stock market returns. We use dynamic factor analysis for large datasets to summarize a large amount of economic info ..."
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Cited by 35 (6 self)
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Existing empirical literature on the riskreturn relation uses a relatively small amount of conditioning information to model the conditional mean and conditional volatility of excess stock market returns. We use dynamic factor analysis for large datasets to summarize a large amount of economic information by few estimated factors, and find that three new factors termed “volatility,” “risk premium,” and “real” factors contain important information about onequarterahead excess returns and volatility not contained in commonly used predictor variables. Our specifications predict 1620 % of the onequarterahead variation in excess stock market returns, and exhibit stable and statistically significant outofsample forecasting power. We also find a positive conditional riskreturn correlation.
Exotic Preferences for Macroeconomists
 In NBER Macroeconomics Annual 2004
, 2005
"... We provide a user’s guide to “exotic ” preferences: nonlinear time aggregators, departures from expected utility, preferences over time with known and unknown probabilities, risksensitive and robust control, “hyperbolic ” discounting, and preferences over sets (“temptations”). We apply each to a num ..."
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Cited by 18 (4 self)
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We provide a user’s guide to “exotic ” preferences: nonlinear time aggregators, departures from expected utility, preferences over time with known and unknown probabilities, risksensitive and robust control, “hyperbolic ” discounting, and preferences over sets (“temptations”). We apply each to a number of classic problems in macroeconomics and finance, including consumption and saving, portfolio choice, asset pricing, and Pareto optimal allocations.
What’s vol got to do with it
 Review of Financial Studies
, 2011
"... Uncertainty plays a key role in economics, finance, and decision sciences. Financial markets, in particular derivative markets, provide fertile ground for understanding how perceptions of economic uncertainty and cashflow risk manifest themselves in asset prices. We demonstrate that the variance pre ..."
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Cited by 17 (1 self)
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Uncertainty plays a key role in economics, finance, and decision sciences. Financial markets, in particular derivative markets, provide fertile ground for understanding how perceptions of economic uncertainty and cashflow risk manifest themselves in asset prices. We demonstrate that the variance premium, defined as the difference between the squared VIX index and expected realized variance, captures attitudes toward uncertainty. We show conditions under which the variance premium displays significant time variation and return predictability. A calibrated, generalized LongRun Risks model generates a variance premium with time variation and return predictability that is consistent with the data, while simultaneously matching the levels and volatilities of the market return and risk free rate. Our evidence indicates an important role for transient nonGaussian shocks to fundamentals that affect agents ’ views of economic uncertainty and prices. We thank seminar participants at Wharton, the CREATES workshop ‘New Hope for the CCAPM?’,
Explosive Behavior in the 1990s Nasdaq: When Did Exuberance Escalate Asset Values?
, 2009
"... A recursive test procedure is suggested that provides a mechanism for testing explosive behavior, datestamping the origination and collapse of economic exuberance, and providing valid confidence intervals for explosive growth rates. The method involves the recursive implementation of a rightside u ..."
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Cited by 12 (9 self)
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A recursive test procedure is suggested that provides a mechanism for testing explosive behavior, datestamping the origination and collapse of economic exuberance, and providing valid confidence intervals for explosive growth rates. The method involves the recursive implementation of a rightside unit root test and a sup test, both of which are easy to use in practical applications, and some new limit theory for mildly explosive processes. The test procedure is shown to have discriminatory power in detecting periodically collapsing bubbles, thereby overcoming a weakness in earlier applications of unit root tests for economic bubbles. An empirical application to Nasdaq stock price index in the 1990s provides confirmation of explosiveness and datestamps the origination of financial exuberance to mid1995, prior to the famous remark in December 1996 by Alan Greenspan about irrational exuberance in financial
2009), “How Useful are Historical Data for Forecasting the LongRun Equity Return Distribution
 Center for Computational Mathematics Reports No 242, University of Colarado at Denver
"... We provide an approach to forecasting the longrun (unconditional) distribution of equity returns making optimal use of historical data in the presence of structural breaks. Our focus is on learning about breaks in real time and assessing their impact on outofsample density forecasts. Forecasts us ..."
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Cited by 6 (0 self)
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We provide an approach to forecasting the longrun (unconditional) distribution of equity returns making optimal use of historical data in the presence of structural breaks. Our focus is on learning about breaks in real time and assessing their impact on outofsample density forecasts. Forecasts use a probabilityweighted average of submodels, each of which is estimated over a different history of data. The empirical results strongly reject ignoring structural change or using a fixedlength moving window. The shape of the longrun distribution is affected by breaks, which has implications for risk management and longrun investment decisions. KEY WORDS:
Consumption Volatility and the CrossSection of Stock Returns, working paper
"... In this paper, I show that conditional volatility of consumption accounts for differences in risk premia across size and booktomarket sorted portfolios both for short and long horizons. In particular, I find that value stocks pay high average returns because they covary more negatively with change ..."
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Cited by 5 (1 self)
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In this paper, I show that conditional volatility of consumption accounts for differences in risk premia across size and booktomarket sorted portfolios both for short and long horizons. In particular, I find that value stocks pay high average returns because they covary more negatively with changes in consumption volatility than what other stocks do. I argue that consumption volatility risk is relevant for interpreting differences in risk compensation across assets.
Quantitative asset pricing implications of housing collateral constraints
, 2005
"... paper circulated earlier under the title ‘A Theory of Housing Collateral, Consumption Insurance, and Risk To explain the variation in US asset returns in the 20th century, we solve an equilibrium model in which households face housing collateral constraints. An increase in the ratio of housing to hu ..."
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Cited by 4 (0 self)
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paper circulated earlier under the title ‘A Theory of Housing Collateral, Consumption Insurance, and Risk To explain the variation in US asset returns in the 20th century, we solve an equilibrium model in which households face housing collateral constraints. An increase in the ratio of housing to human wealth loosens these constraints. It allows for more risk sharing and decreases the rate of return that households require for holding equity. This collateral mechanism can explain the timevariation in equity and riskfree debt returns and the crosssectional variation in equity returns in the US. Feeding into