TY  - JOUR
AU  - Bekaert,Geert
AU  - Engstrom,Eric
AU  - Xing,Yuhang
TI  - Risk, Uncertainty and Asset Prices
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12248
PY  - 2006
Y2  - May 2006
UR  - http://www.nber.org/papers/w12248
L1  - http://www.nber.org/papers/w12248.pdf
N1  - Author contact info:
Geert Bekaert
Graduate School of Business
Columbia University
3022 Broadway, 411 Uris Hall
New York, NY 10027
Tel: 212/854-9156
Fax: 212/662-8474
E-Mail: gb241@columbia.edu

Eric Engstrom
Board of Governors of the Federal Reserve System
Washington DC 20551
Tel: 734-763-6391
Fax: 734-764-3146
E-Mail: eric.engstrom@frb.gov

Yuhang Xing
Rice University
Jones School of Management, MS 531
Rice  University
6100 Main Street
Houston, TX 77004
Tel: 7133484167
E-Mail: yxing@rice.edu
AB  - We identify the relative importance of changes in the conditional variance of fundamentals (which we call %u201Cuncertainty%u201D) and changes in risk aversion (%u201Crisk%u201D for short) in the determination of the term structure, equity prices and risk premiums. Theoretically, we introduce persistent time-varying uncertainty about the fundamentals in an external habit model. The model matches the dynamics of dividend and consumption growth, including their volatility dynamics and many salient asset market phenomena. While the variation in dividend yields and the equity risk premium is primarily driven by risk, uncertainty plays a large role in the term structure and is the driver of counter-cyclical volatility of asset returns.
ER  -