Macroeconomic Volatilities and Long-Run Risks of Asset Prices

38 Pages Posted: 13 May 2009 Last revised: 18 Mar 2014

Guofu Zhou

Washington University in St. Louis - Olin School of Business

Yingzi Zhu

Tsinghua University - School of Economics & Management

Date Written: February 21, 2014

Abstract

In this paper, motivated by existing and growing evidence on multiple macroeconomic volatilities, we extend the long-run risks model of Bansal and Yaron (2004) by allowing both a long- and a short-run volatility components in the evolution of economic fundamentals. With this extension, the new model not only is consistent with the volatility literature that the stock market is driven by two, rather than one, volatility factors, but also provides significant improvements in fitting various patterns, such as the size of market risk premium, level of interest rate, degree of dividend yield predictability, and the term structure of variance risk premiums, of both the equity and option data.

Keywords: Long-run Risk, Equity Risk Premium, Predictability, Variance Risk Premium

JEL Classification: G12, G13, E43

Suggested Citation

Zhou, Guofu and Zhu, Yingzi, Macroeconomic Volatilities and Long-Run Risks of Asset Prices (February 21, 2014). Available at SSRN: https://ssrn.com/abstract=1403869 or http://dx.doi.org/10.2139/ssrn.1403869

Guofu Zhou (Contact Author)

Washington University in St. Louis - Olin School of Business ( email )

Washington University
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6384 (Phone)
314-658-6359 (Fax)

HOME PAGE: http://apps.olin.wustl.edu/faculty/zhou/

Yingzi Zhu

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China
+86-10-62786041 (Phone)

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