Valuation Risk Revalued

57 Pages Posted: 8 May 2020

See all articles by Oliver de Groot

Oliver de Groot

University of Liverpool Management School

Alexander W. Richter

Federal Reserve Bank of Dallas

Nathaniel Throckmorton

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: April 2020

Abstract

This paper shows the success of valuation risk-time-preference shocks in Epstein-Zin utility-in resolving asset pricing puzzles rests sensitively on the way it is introduced. The specification used in the literature violates several desirable properties of recursive preferences because the weights in the Epstein-Zin time-aggregator do not sum to one. When we revise the specification in a simple asset pricing model the puzzles resurface. However, when estimating a sequence of increasingly rich models, we find valuation risk under the revised specification consistently improves the ability of the models to match asset price and cash-flow dynamics.

Keywords: Asset Pricing, Equity premium puzzle, recursive utility, Risk-Free Rate Puzzle

JEL Classification: C15, D81, G12

Suggested Citation

de Groot, Oliver and Richter, Alexander W. and Throckmorton, Nathaniel, Valuation Risk Revalued (April 2020). CEPR Discussion Paper No. DP14588. Available at SSRN: https://ssrn.com/abstract=3594210

Oliver De Groot (Contact Author)

University of Liverpool Management School ( email )

Alexander W. Richter

Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
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Dallas, TX 75265-5906
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HOME PAGE: http://alexrichterecon.com

Nathaniel Throckmorton

affiliation not provided to SSRN

No Address Available

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