Macroeconomic Tail Risks and Asset Prices

The Review of Financial Studies, Forthcoming

57 Pages Posted: 27 Feb 2018 Last revised: 25 Sep 2019

Date Written: April 24, 2019

Abstract

I document that dividend growth and returns on the aggregate U.S. stock market are more correlated with consumption growth in bad economic times. In a consumption-based asset pricing model with a generalized disappointment averse investor and small, IID consumption shocks, this feature results in a realistic equity premium despite low risk aversion. The model is consistent with the main facts about stock market risk premia inferred from equity index options, remains tightly parameterized, and allows for analytical solutions for asset prices. An extension with non-IID dynamics accounts for excess volatility and return predictability while preserving the model's consistency with option moments.

Keywords: macroeconomic tail risk, equity index options, equity premium puzzle, generalized disappointment aversion, risk aversion

JEL Classification: G12, G13

Suggested Citation

Schreindorfer, David, Macroeconomic Tail Risks and Asset Prices (April 24, 2019). The Review of Financial Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3125118 or http://dx.doi.org/10.2139/ssrn.3125118

David Schreindorfer (Contact Author)

Arizona State University ( email )

Farmer Building 440G PO Box 872011
Tempe, AZ 85287
United States
4809656212 (Phone)

HOME PAGE: http://www.davidschreindorfer.com

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