The forward- and the equity-premium puzzles: two symptoms of the same illness?

Paulo Rogério Faustino Matos, Carlos Eugênio da Costa () and João Issler

No 649, FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) from EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil)

Abstract: In this paper we revisit the relationship between the equity and the forward premium puzzles. We construct return-based stochastic discount factors under very mild assumptions and check whether they price correctly the equity and the foreign currency risk premia. We avoid log-linearizations by using moments restrictions associated with euler equations to test the capacity of our return-based stochastic discount factors to price returns on the relevant assets. Our main finding is that a pricing kernel constructed only using information on American domestic assets accounts for both domestic and international stylized facts that escape consumption based models. In particular, we fail to reject the null hypothesis that the foreign currency risk premium has zero price when the instrument is the own current value of the forward premium.

Date: 2007-08-01
New Economics Papers: this item is included in nep-upt
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Related works:
Working Paper: The forward- and the equity-premium puzzles: two symptoms of the same illness? (2012)
Working Paper: The forward- and the equity-premium puzzles: two symptoms of the same illness? (2010)
Working Paper: The forward- and the equity-premium puzzles: two symptoms of the same illness? (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:fgv:epgewp:649

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