Valuation Risk and Asset Pricing

Posted: 1 Feb 2013

See all articles by Rui A. Albuquerque

Rui A. Albuquerque

Boston College, Carroll School of Management; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Martin Eichenbaum

Northwestern University; National Bureau of Economic Research (NBER)

Sergio T. Rebelo

Northwestern University - Kellogg School of Management; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: December 2012

Abstract

Standard representative-agent models have difficulty in accounting for the weak correlation between stock returns and measurable fundamentals, such as consumption and output growth. This failing underlies virtually all modern asset-pricing puzzles. The correlation puzzle arises because these models load all uncertainty onto the supply side of the economy. We propose a simple theory of asset pricing in which demand shocks play a central role. These shocks give rise to valuation risk that allows the model to account for key asset pricing moments, such as the equity premium, the bond term premium, and the weak correlation between stock returns and fundamentals.

Keywords: bond yields, Equity premium, risk premium

JEL Classification: G12

Suggested Citation

Albuquerque, Rui A. and Eichenbaum, Martin and Tavares Rebelo, Sergio, Valuation Risk and Asset Pricing (December 2012). CEPR Discussion Paper No. DP9262. Available at SSRN: https://ssrn.com/abstract=2210232

Rui A. Albuquerque (Contact Author)

Boston College, Carroll School of Management ( email )

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HOME PAGE: http://ruialbuquerque.webs.com

Centre for Economic Policy Research (CEPR)

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Martin Eichenbaum

Northwestern University ( email )

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National Bureau of Economic Research (NBER)

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Sergio Tavares Rebelo

Northwestern University - Kellogg School of Management ( email )

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847-467-2329 (Phone)
847-491-5719 (Fax)

Centre for Economic Policy Research (CEPR)

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United Kingdom

National Bureau of Economic Research (NBER)

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United States

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