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

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

No 697, FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) from EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil)

Abstract: We build a pricing kernel using only US domestic assets data and check whether it accounts for foreign markets stylized facts that escape consumption based models. By interpreting our stochastic discount factor as the projection of a pricing kernel from a fully specified model in the space of returns, our results indicate that a model that accounts for the behavior of domestic assets goes a long way toward accounting for the behavior of foreign assets. We address predictability issues associated with the forward premium puzzle by: i) using instruments that are known to forecast excess returns in the moments restrictions associated with Euler equations, and; ii) by pricing Lustig and Verdelhan (2007)'s foreign currency portfolios. Our results indicate that the relevant state variables that explain foreign-currency market asset prices are also the driving forces behind U.S. domestic assets behavior.

Date: 2009-08-12
New Economics Papers: this item is included in nep-dge, nep-ifn and 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? (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:fgv:epgewp:697

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