Rational Pessimism, Rational Exuberance, and Asset Pricing Models

Ravi Bansal, A. Gallant and George Tauchen ()

The Review of Economic Studies, 2007, vol. 74, issue 4, 1005-1033

Abstract: The paper estimates and examines the empirical plausibility of asset pricing models that attempt to explain features of financial markets such as the size of the equity premium and the volatility of the stock market. In one model, the long-run risks (LRR) model of Bansal and Yaron, low-frequency movements, and time-varying uncertainty in aggregate consumption growth are the key channels for understanding asset prices. In another, as typified by Campbell and Cochrane, habit formation, which generates time-varying risk aversion and consequently time variation in risk premia, is the key channel. These models are fitted to data using simulation estimators. Both models are found to fit the data equally well at conventional significance levels, and they can track quite closely a new measure of realized annual volatility. Further, scrutiny using a rich array of diagnostics suggests that the LRR model is preferred. Copyright 2007, Wiley-Blackwell.

Date: 2007
References: Add references at CitEc
Citations: View citations in EconPapers (80)

Downloads: (external link)
http://hdl.handle.net/10.1111/j.1467-937X.2007.00454.x (application/pdf)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Rational Pessimism, Rational Exuberance, and Asset Pricing Models (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:74:y:2007:i:4:p:1005-1033

Access Statistics for this article

The Review of Economic Studies is currently edited by Thomas Chaney, Xavier d’Haultfoeuille, Andrea Galeotti, Bård Harstad, Nir Jaimovich, Katrine Loken, Elias Papaioannou, Vincent Sterk and Noam Yuchtman

More articles in The Review of Economic Studies from Review of Economic Studies Ltd
Bibliographic data for series maintained by Oxford University Press ().