Valuation risk revalued

de Groot, Oliver ORCID: 0000-0002-6853-1129, Richter, Alexander W and Throckmorton, Nathaniel A
(2022) Valuation risk revalued. QUANTITATIVE ECONOMICS, 13 (2). pp. 723-759.

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<jats:p>This paper shows the success of valuation risk—time‐preference shocks in Epstein–Zin utility—in resolving asset pricing puzzles rests sensitively on the way it is introduced. The specification used in the literature is at odds with several desirable properties of recursive preferences because the weights in the time‐aggregator do not sum to one. When we revise the specification in a simple asset pricing model the puzzles resurface. However, when estimating a sequence of increasingly rich models, we find valuation risk under the revised specification consistently improves the ability of the models to match asset price and cash‐flow dynamics.</jats:p>

Item Type: Article
Uncontrolled Keywords: Recursive utility, asset pricing, equity premium puzzle, risk-free rate puzzle
Divisions: Faculty of Humanities and Social Sciences > School of Management
Depositing User: Symplectic Admin
Date Deposited: 22 Nov 2021 08:08
Last Modified: 18 Jan 2023 21:24
DOI: 10.3982/QE1779
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