Asset Pricing with Persistence Risk

Review of Financial Studies, Forthcoming

61 Pages Posted: 7 Sep 2017 Last revised: 21 Nov 2018

See all articles by Daniel Andrei

Daniel Andrei

McGill University

Michael Hasler

University of Texas at Dallas, Naveen Jindal School of Management, Department of Finance

Alexandre Jeanneret

UNSW Business School

Date Written: November 16, 2018

Abstract

Persistence risk is an endogenous source of risk that arises when a rational agent learns about the length of business cycles. Persistence risk is positive during recessions and negative during expansions. This asymmetry, which solely results from learning about persistence, causes expected returns, return volatility, and the price of risk to rise during recessions. Persistence risk predicts future excess returns, particularly at 3- to 7-year horizons. Its predictability is strongest around business-cycle peaks and troughs. We confirm the model's predictions in the data and provide evidence that persistence risk is priced in financial markets.

Keywords: persistence risk, learning, long-run risk

JEL Classification: G12

Suggested Citation

Andrei, Daniel and Hasler, Michael and Jeanneret, Alexandre, Asset Pricing with Persistence Risk (November 16, 2018). Review of Financial Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3032238 or http://dx.doi.org/10.2139/ssrn.3032238

Daniel Andrei (Contact Author)

McGill University ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada

Michael Hasler

University of Texas at Dallas, Naveen Jindal School of Management, Department of Finance ( email )

800 West Campbell
Richarson, TX 75080
United States

Alexandre Jeanneret

UNSW Business School ( email )

Sydney, NSW 2052
Australia

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