On Sources of Risk Premia in Representative Agent Models

40 Pages Posted: 13 Sep 2019 Last revised: 11 Dec 2019

See all articles by Tyler Beason

Tyler Beason

Arizona State University (ASU) - Finance Department

David Schreindorfer

Arizona State University

Date Written: September 12, 2019

Abstract

We use options and return data to decompose unconditional risk premia into different parts of the return state space. In the data, the entire equity premium is attributable to monthly returns below -11.3%, but returns in the extreme left tail matter very little. In contrast, leading asset pricing models based on habits, long-run risks, and rare disasters attribute the premium almost exclusively to returns above -11.3%, or to the extreme left tail. We find that model extensions with a larger quantity of tail risk cannot account for the data, while models with a higher price of tail risk can.

Keywords: tail risk, equity premium decomposition, model diagnostic, Arrow-Debreu securities, equity index options

JEL Classification: G12, G13

Suggested Citation

Beason, Tyler and Schreindorfer, David, On Sources of Risk Premia in Representative Agent Models (September 12, 2019). Available at SSRN: https://ssrn.com/abstract=3452743 or http://dx.doi.org/10.2139/ssrn.3452743

Tyler Beason

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

HOME PAGE: http://tbeason.com

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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