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http://ssrn.com/abstract=507122
 
 

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Inflation and Earnings Uncertainty and Volatility Forecasts: A Structural Form Approach


Alexander David


University of Calgary - Haskayne School of Business

Pietro Veronesi


University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

March 18, 2008

Chicago GSB Research Paper
University of Calgary Haskyane School of Business Working Paper

Abstract:     
We propose a new structural form methodology for understanding the fluctuations and predictability of volatilities and covariances of asset returns. In our model, a representative agent learns about the joint movements in inflation and real earnings through business cycles. We extract investors' beliefs about fundamentals from the prices and volatilities of stocks and bonds. The duration of episodes of enhanced investors' uncertainty are forecastable and lead to forecasts of volatilities that are far more precise than those based on reduced-form models that include lags and macroeconomic variables. The model's success stems largely from endogenous and time varying weights that investors assign to news about real fundamental growth and their pricing kernel.

Number of Pages in PDF File: 55

JEL Classification: G10, G11, G12, G14

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Date posted: February 27, 2004 ; Last revised: March 20, 2009

Suggested Citation

David, Alexander and Veronesi, Pietro, Inflation and Earnings Uncertainty and Volatility Forecasts: A Structural Form Approach (March 18, 2008). Chicago GSB Research Paper; University of Calgary Haskyane School of Business Working Paper. Available at SSRN: http://ssrn.com/abstract=507122 or http://dx.doi.org/10.2139/ssrn.507122

Contact Information

Alexander David (Contact Author)
University of Calgary - Haskayne School of Business ( email )
2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada
Pietro Veronesi
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-6348 (Phone)
773-702-0458 (Fax)
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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