Valuation Risk and Asset Pricing

Rui Albuquerque, Martin S. Eichenbaum, Sergio Rebelo

NBER Working Paper No. 18617
Issued in December 2012, Revised in June 2015
NBER Program(s):The Asset Pricing Program

Standard representative-agent models fail to account for the weak correlation between stock returns and measurable fundamentals, such as consumption and output growth. This failing, which underlies virtually all modern asset-pricing puzzles, 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.

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Document Object Identifier (DOI): 10.3386/w18617

Published: RUI ALBUQUERQUE & MARTIN EICHENBAUM & VICTOR XI LUO & SERGIO REBELO, 2016. "Valuation Risk and Asset Pricing," The Journal of Finance, vol 71(6), pages 2861-2904. citation courtesy of

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