Recursive preferences, long-run risks, and stock valuation

Claude Bergeron ()
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Claude Bergeron: School of Business Administration, Teluq University

Economics Bulletin, 2019, vol. 39, issue 2, 996-1004

Abstract: In this note, we develop a stock valuation model with recursive preferences and long-run risks. The model is based on the Epstein and Zin (1989, 1991) and Weil (1989) recursive utility framework. Our main result indicates that the intrinsic value of a stock is negatively related to (i) the long-run covariance between dividends and aggregate consumption, and (ii) the long-run covariance between dividends and market returns. This theoretical finding suggests that the sensitivity of dividends to market returns and aggregate consumption affects the long-run risk of a firm and its equity value.

Keywords: Recursive preferences; Asset pricing; Long-run risk; Stock valuation (search for similar items in EconPapers)
JEL-codes: G1 (search for similar items in EconPapers)
Date: 2019-05-02
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Citations: View citations in EconPapers (1)

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