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Keywords:asset pricing OR Asset pricing OR Asset Pricing 

Working Paper
Liquidity Premia, Price-Rent Dynamics, and Business Cycles

n the U.S. economy during the past 25 years, house prices exhibit fluctuations considerably larger than house rents, and these large fluctuations tend to move together with business cycles. We build a simple theoretical model to characterize these observations by showing the tight connection between price-rent fluctuation and the liquidity constraint faced by productive firms. After developing economic intuition for this result, we estimate a medium-scale dynamic general equilibrium model to assess the empirical importance of the role the price-rent fluctuation plays in the business cycle. ...
FRB Atlanta Working Paper , Paper 2014-15

Journal Article
Expected stock market returns and business investment

National Economic Trends , Issue Jul

Report
On the need for a new approach to analyzing monetary policy

We present a pricing kernel that summarizes well the main features of the dynamics of interest rates and risk in postwar U.S. data and use it to uncover how the pricing kernel has moved with the short rate. Our findings imply that standard monetary models miss an essential link between the central bank instrument and the economic activity that monetary policy is intended to affect, and thus we call for a new approach to monetary policy analysis. We sketch a new approach using an economic model based on our pricing kernel. The model incorporates the key relationships between policy and risk ...
Staff Report , Paper 412

Report
Resurrecting the (C)CAPM: a cross-sectional test when risk premia are time-varying

This paper explores the ability of theoretically based asset pricing models such as the CAPM and the consumption CAPM-referred to jointly as the (C)CAPM - to explain the cross-section of average stock returns. Unlike many previous empirical tests of the (C)CAPM, we specify the pricing kernel as a conditional linear factor model, as would be expected if risk premia vary over time. Central to our approach is the use of a conditioning variable which proxies for fluctuations in the log consumption-aggregate wealth ratio and is likely to be important for summarizing conditional expectations of ...
Staff Reports , Paper 93

Journal Article
Pricing firms on the basis of fundamentals

Determining the right or fair price of a stock is one of the oldest problems in finance. Business mergers and acquisitions rely on this information, but only in the last several decades have formal models been developed to address the question. This article focuses on fundamental valuation, a technique that determines the right price by forecasting cash flows from a stock market investment and calculating what that income is worth. ; The author first provides an overview of the literature and an illustration of commonly used fundamental valuation techniques based on relative valuation and the ...
Economic Review , Volume 88 , Issue Q1 , Pages 49-70

Working Paper
Bubbles and Leverage: A Simple and Unified Approach

In this paper, we lay out a simple framework that captures much of what the theoretical literature has to say about the role of credit in systemically important asset booms and busts. In addition, we suggest ways in which to incorporate physical investment in the bubble asset as well as monetary policy.
Working Paper Series , Paper WP-2013-21

Journal Article
Asset price booms and current account deficits

Before the global financial crisis of 2007?2009, the United States and several other countries posted large current account deficits. Many of these countries also experienced asset price booms. Evidence suggests the two developments were linked. Rising asset values in the United States permitted households to borrow more easily to boost consumption, while the net sale of debt securities abroad financed current account deficits. The fall in some asset prices since the crisis can make it easier to reduce current account imbalances.
FRBSF Economic Letter

Working Paper
Minimum-variance kernels, economic risk premia, and tests of multi-beta models

This paper uses minimum-variance (MV) admissible kernels to estimate risk premia associated with economic risk variables and to test multi-beta models. Estimating risk premia using MV kernels is appealing because it avoids the need to 1) identify all relevant sources of risk and 2) assume a linear factor model for asset returns. Testing multi-beta models in terms of restricted MV kernels has the advantage that 1) the candidate kernel has the smallest volatility and 2) test statistics are easy to interpret in terms of Sharpe ratios. The authors find that several economic variables command ...
FRB Atlanta Working Paper , Paper 2001-24

Working Paper
Temporal risk aversion and asset prices

Agents with standard, time-separable preferences do not care about the temporal distribution of risk. This is a strong assumption. For example, it seems plausible that a consumer may find persistent shocks to consumption less desirable than uncorrelated fluctuations. Such a consumer is said to exhibit temporal risk aversion. This paper examines the implications of temporal risk aversion for asset prices. The innovation is to work with expected utility preferences that (i) are not time-separable, (ii) exhibit temporal risk aversion, (iii) separate risk aversion from the intertemporal ...
Finance and Economics Discussion Series , Paper 2008-37

Working Paper
Can long-horizon forecasts beat the random walk under the Engel-West explanation?

Engel and West (EW, 2005) argue that as the discount factor gets closer to one, present-value asset pricing models place greater weight on future fundamentals. Consequently, current fundamentals have very weak forecasting power and exchange rates appear to follow approximately a random walk. We connect the Engel-West explanation to the studies of exchange rates with long-horizon regressions. We find that under EW's assumption that fundamentals are I(1) and observable to the econometrician, long-horizon regressions generally do not have significant forecasting power. However, when EW's ...
Globalization Institute Working Papers , Paper 36

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