TY  - JOUR
AU  - Bansal,Ravi
AU  - Yaron,Amir
TI  - Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8059
PY  - 2000
Y2  - December 2000
UR  - http://www.nber.org/papers/w8059
L1  - http://www.nber.org/papers/w8059.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

Amir Yaron
The Wharton School
University of Pennsylvania
2256 Steinberg-Dietrich Hall
Philadelphia, PA 19104-6367
Tel: 215/898-1241
Fax: 215/898-6200
E-Mail: yaron@wharton.upenn.edu
AB  - We model dividend and consumption growth rates as containing a small long-run predictable component and economic uncertainty (i.e., growth rate volatility) as being time-varying.  The magnitudes of the predictable variation and changing volatility in growth rates, as in the data, are quite small.  These growth rate dynamics, for which we provide empirical support, in conjunction with plausible parameter configurations of the Epstein and Zin (1989) preferences can explain key observed asset markets phenomena.  In particular, we show that the model can justify the observed equity premium, the low risk free rate, and the ex-post volatilities of the market return, real risk free rate, and the price-dividend ratio.  As in the data, the model also implies that dividend yields predict returns and that market return volatility is stochastic.  The main economic insight we capture is that news about growth rates significantly alter agent's perceptions regarding long run expected growth rates and growth rate uncertainty--in equilibrium, this leads to a large equity risk premium, low risk free interest rate, and large market volatility.
ER  -