Search Results
Discussion Paper
The Puzzling Pre-FOMC Announcement “Drift”
For many years, economists have struggled to explain the ?equity premium puzzle??the fact that the average return on stocks is larger than what would be expected to compensate for their riskiness. In this post, which draws on our recent New York Fed staff report, we deepen the puzzle further. We show that since 1994, more than 80 percent of the equity premium on U.S. stocks has been earned over the twenty-four hours preceding scheduled Federal Open Market Committee (FOMC) announcements (which occur only eight times a year)?a phenomenon we call the pre-FOMC announcement ?drift.?
Working Paper
Learning, Rare Disasters, and Asset Prices
In this paper, we examine how learning about disaster risk affects asset pricing in an endowment economy. We extend the literature on rare disasters by allowing for two sources of uncertainty: (1) the lack of historical data results in unknown parameters for the disaster process, and (2) the disaster takes time to unfold and is not directly observable. The model generates time variation in the risk premium through Bayesian updating of agents' beliefs regarding the likelihood and severity of disaster realization. The model accounts for the level and volatility of U.S. equity returns and ...
Working Paper
Ambiguity, Long-Run Risks, and Asset Prices
I generalize the long-run risks (LRR) model of Bansal and Yaron (2004) by incorporatingrecursive smooth ambiguity aversion preferences from Klibanoff et al. (2005, 2009) and time-varyingambiguity. Relative to the Bansal-Yaron model, the generalized LRR model is as tractable but moreflexible due to its separation of ambiguity aversion from both risk aversion and the intertemporalelasticity of substitution. This three-way separation allows the model to further account for thevariance premium puzzle besides the puzzles of the equity premium, the risk-free rate, and the returnpredictability. ...
Working Paper
Precautionary Volatility and Asset Prices
Many theories of asset prices assume time-varying uncertainty in order to generate time-varying risk premia. This paper generates time-varying uncertainty endogenously, through precautionary saving dynamics. Precautionary motives prescribe that, in bad times, next period's consumption should be very sensitive to news. This time-varying sensitivity results in time-varying consumption volatility. Production makes this channel visible, and external habit preferences amplify it. An estimated model featuring this channel quantitatively accounts for excess return and dividend predictability ...