Valuation Risk and Asset Pricing
NBER Working Paper No. 18617
Standard representative-agent models have difficulty in accounting for the weak correlation between stock returns and measurable fundamentals, such as consumption and output growth. This failing underlies virtually all modern asset-pricing puzzles. The correlation puzzle arises because these models load all uncertainty onto the supply side of the economy. We propose a simple theory of asset pricing in which demand shocks play a central role. These shocks give rise to valuation risk that allows the model to account for key asset pricing moments, such as the equity premium, the bond term premium, and the weak correlation between stock returns and fundamentals.
You may purchase this paper on-line in .pdf format from SSRN.com ($5) for electronic delivery.
This paper was revised on June 13, 2014
Document Object Identifier (DOI): 10.3386/w18617
Users who downloaded this paper also downloaded these: