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Working Paper
From Which Consumption-Based Asset Pricing Models Can Investors Profit? Evidence from Model-Based Priors
This paper compares consumption-based asset pricing models based on the forecasting performance of investors who use economic constraints derived from the models to predict the equity premium. Three prominent asset pricing models are considered: Habit Formation, Long Run Risk, and Prospect Theory. I propose a simple Bayesian framework through which the investors impose the economic constraints as model-based priors on the parameters of their predictive regressions. An investor whose prior beliefs are rooted in the Long Run Risk model achieves more accurate forecasts overall. The greatest ...
Working Paper
Institutions and return predictability in oil-exporting countries
We study whether stock market returns in oil-exporting countries can be predicted by oil price changes, and we investigate the link between predictability and the quality of each country's institutions. Returns are predictable for half the countries we consider, and predictability is stronger when institutional quality is lower. We argue that the relation between predictability and institutional quality reflects the preference of countries with weaker institutions to consume oil windfalls locally rather than smooth out the impact of windfalls by, for instance, investing the proceeds through a ...
Report
There Is No Excess Volatility Puzzle
We present two valuation models which we use to account for the annual data on price per share and dividends per share for the CRSP Value-Weighted Index from 1929 to 2023. We show that it is a simple matter to account for these data based purely on a model of variation over time in the expected ratio of dividends per share to aggregate consumption under two conditions. First, investors must receive news shocks regarding the expected ratio of dividends per share to aggregate consumption in the long run. Second, the discount rate used to evaluate the impact of this news on the current price per ...