Short-run risk, business cycle, and the value premium

Yunhao He and Markus Leippold ()

Journal of Economic Dynamics and Control, 2020, vol. 120, issue C

Abstract: We jointly explain the equity and value premium variations in a model with both short-run (SRR) and long-run (LRR) consumption risk. In our empirical analysis, we find that SRR varies with the business cycle, and it has a substantial predictive power for market excess returns and the value premium—both in-sample and out-of-sample. The LRR component also differs significantly from zero, and value stocks have a larger exposure to both LRR and SRR than growth stocks. To explain these patterns in asset returns, we propose an extended LRR model. The model can be solved using log-linear approximations with economically small errors.

Keywords: Long-run and short-run consumption risk; Value premium; Business cycle; Portfolio selection; stochastic covariance (search for similar items in EconPapers)
JEL-codes: C32 E44 G12 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:120:y:2020:i:c:s0165188920301615

DOI: 10.1016/j.jedc.2020.103993

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