A note on 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 743, FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) from EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil)

Abstract: We build a stochastic discount factor—SDF— using information on US domestic financial data only, and provide evidence that it accounts for foreign markets stylized facts that escape SDF’s generated by consumption based models. By interpreting our SDF as the projection of the 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 prices. In our tests, we address predictability, a defining feature of the Forward Premium Puzzle—FPP— by using instruments that are known to forecast excess returns in the moments restrictions associated with Euler equations both in the equity and the foreign markets.

Date: 2013-07-12
New Economics Papers: this item is included in nep-for
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Journal Article: A NOTE ON THE FORWARD AND THE EQUITY PREMIUM PUZZLES: TWO SYMPTOMS OF THE SAME ILLNESS? (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:fgv:epgewp:743

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