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Working Paper
Valuation Risk Revalued
The recent asset pricing literature finds valuation risk is an important determinant of key asset pricing moments. Valuation risk is modelled as a time preference shock within Epstein-Zin recursive utility preferences. While this form of valuation risk appears to fit the data extremely well, we show the preference specification violates an economically meaningful restriction on the weights in the Epstein-Zin time-aggregator. The same model with the corrected preference specification performs nearly as well at matching asset pricing moments, but only if the risk aversion parameter is well ...
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. ...