Risk, Uncertainty, and Asset Prices

Journal of Financial Economics, Vol. 91, No. 1, 59-82, 2009

Posted: 21 Oct 2011  

Geert Bekaert

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Eric Engstrom

U.S. Board of Governors of the Federal Reserve System - Division of Research and Statistics, Capital Markets

Yuhang Xing

Rice University

Multiple version iconThere are 4 versions of this paper

Date Written: 2009

Abstract

We identify the relative importance of changes in the conditional variance of fundamentals (which we call "uncertainty") and changes in risk aversion in the determination of the term structure, equity prices, and risk premiums. Theoretically, we introduce persistent time-varying uncertainty about the fundamentals in an external habit model. The model matches the dynamics of dividend and consumption growth, including their volatility dynamics and many salient asset market phenomena. While the variation in price-dividend ratios and the equity risk premium is primarily driven by risk aversion, uncertainty plays a large role in the term structure and is the driver of counter-cyclical volatility of asset returns.

Suggested Citation

Bekaert, Geert and Engstrom, Eric and Xing, Yuhang, Risk, Uncertainty, and Asset Prices (2009). Journal of Financial Economics, Vol. 91, No. 1, 59-82, 2009. Available at SSRN: https://ssrn.com/abstract=1946959

Geert Bekaert (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Eric C. Engstrom

U.S. Board of Governors of the Federal Reserve System - Division of Research and Statistics, Capital Markets ( email )

20th & C. St., N.W.
Washington, DC 20551
United States
202-452-3044 (Phone)

Yuhang Xing

Rice University ( email )

6100 South Main Street
Houston, TX 7705-1892
United States

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