Valuation Risk and Asset Pricing
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.
We benefited from the comments and suggestions of Fernando Alvarez, Ravi Bansal, Frederico Belo, Jaroslav Borovička, John Campbell, John Cochrane, Lars Hansen, Anisha Ghosh, Ravi Jaganathan, Tasos Karantounias, Howard Kung, Junghoon Lee, Dmitry Livdan, Jonathan Parker, Alberto Rossi, Costis Skiadas, Ivan Werning, and Amir Yaron. We thank Robert Barro, Emi Nakamura, Jón Steinsson, and José Ursua for sharing their data with us and Benjamin Johannsen for superb research assistance. Albuquerque gratefully acknowledges financial support from the European Union Seventh Framework Programme (FP7/2007-2013) under grant agreement PCOFUND-GA-2009-246542. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. A previous version of this paper was presented under the title "Understanding the Equity Premium Puzzle and the Correlation Puzzle," http://tinyurl.com/akfmvxb.
Martin S. Eichenbaum
Non-teaching compensated activities: 2009 through 2012 (excludes token honoraria).
Co-editor, American Economic Review, 2011 - .
Associate Editor, Journal of Monetary Economics, 1989 – 2010.
Federal Reserve Bank of Atlanta, advisor.
Federal Reserve Bank of Chicago, advisor.
Jefferies Associates, economic outlook talk.
Hightower Associates, consultant.
Advisory Council Member, Global Markets Institute at Goldman Sachs.Sergio Rebelo
I have no outside financial relationships that relate to this research. Rebelo's list of outside activities can be found at: http://www.kellogg.northwestern.edu/faculty/rebelo/htm/Outside_Activities.html