Valuation Risk Revalued

Oliver de Groot, Alexander Richter and Nathaniel Throckmorton

No 14588, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper shows the success of valuation risk—time-preference shocks in Epstein-Zin utility—in resolving asset pricing puzzles rests sensitively on the way it is introduced. The specification used in the literature violates several desirable properties of recursive preferences because the weights in the Epstein-Zin time-aggregator do not sum to one. When we revise the specification in a simple asset pricing model the puzzles resurface. However, when estimating a sequence of increasingly rich models, we find valuation risk under the revised specification consistently improves the ability of the models to match asset price and cash-flow dynamics.

Keywords: Recursive utility; Asset pricing; Equity premium puzzle; Risk-free rate puzzle (search for similar items in EconPapers)
JEL-codes: C15 D81 G12 (search for similar items in EconPapers)
Date: 2020-04
New Economics Papers: this item is included in nep-cfn, nep-rmg and nep-upt
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Related works:
Journal Article: Valuation risk revalued (2022)
Working Paper: Valuation Risk Revalued (2019)
Working Paper: Valuation Risk Revalued (2018)
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