TY  - JOUR
AU  - Bansal,Ravi
AU  - Shaliastovich,Ivan
TI  - Confidence Risk and Asset Prices
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14815
PY  - 2009
Y2  - March 2009
UR  - http://www.nber.org/papers/w14815
L1  - http://www.nber.org/papers/w14815.pdf
N1  - Author contact info:
Ravi Bansal
Fuqua School of Business
Duke University
1 Towerview Drive
Durham, NC 27708
Tel: 919/660-7758
Fax: 919/660-8038
E-Mail: ravi.bansal@duke.edu

Ivan Shaliastovich
The Wharton School
University of Pennsylvania
2423 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
Tel: 25-746-0005
E-Mail: ishal@wharton.upenn.edu
AB  - In the data, asset prices exhibit large negative moves at frequencies of about 18 months. These large moves are puzzling as they do not coincide, nor are they followed by any significant moves in the real side of the economy. On the other hand, we find that measures of investor's uncertainty about their estimate of future growth have significant information about large moves in returns. We set-up a recursive-utility based model in which investors learn about the latent expected growth using the cross-section of signals. The uncertainty (confidence measure) about investor's growth expectations, as in the data, is time-varying and subject to large moves. The fluctuations in confidence measure affect the distribution of future consumption given investors' information, and consequently influence equilibrium asset prices and risk premia. In calibrations we show that the model can account for the large return move evidence in the data, distribution of asset prices, predictability of excess returns and other key asset market facts.
ER  -