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Valuation Risk and Asset Pricing

63 Pages Posted: 10 Jun 2014 Last revised: 4 Jan 2017

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)

Victor Xi Luo

Stevens Institute of Technology - School of Business; Northwestern University

Sergio T. Rebelo

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

Multiple version iconThere are 3 versions of this paper

Date Written: December 1, 2016

Abstract

Standard representative-agent models fail to account for the weak correlation between stock returns and measurable fundamentals, such as consumption and output growth. This failing, which underlies virtually all modern asset-pricing puzzles, 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: Equity premium, bond yields, risk premium

JEL Classification: G12

Suggested Citation

Albuquerque, Rui A. and Eichenbaum, Martin and Luo, Victor Xi and Rebelo, Sergio T., Valuation Risk and Asset Pricing (December 1, 2016). Journal of Finance 71, 2861-2903, 2016. Available at SSRN: https://ssrn.com/abstract=2447899 or http://dx.doi.org/10.2139/ssrn.2447899

Rui A. Albuquerque (Contact Author)

Boston College, Carroll School of Management ( email )

140 Commonwealth Avenue
Chustnut Hill, MA 02467-3808
United States

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

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Martin Eichenbaum

Northwestern University ( email )

2003 Sheridan Road
Evanston, IL 60208
United States
847-491-8232 (Phone)
847-491-7001 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Victor Xi Luo

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Sergio Tavares Rebelo

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Leverone Hall
Evanston, IL 60208
United States
847-467-2329 (Phone)
847-491-5719 (Fax)

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

University of Rochester - Department of Economics ( email )

Harkness Hall
Rochester, NY 14627
United States
585-275-5252 (Phone)
585-256-2309 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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