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Risk, uncertainty, and asset prices

Geert Bekaert (), Eric Engstrom () and Yuhang Xing

No 2005-40, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We identify the relative importance of changes in the conditional variance of fundamentals (which we call "uncertainty") and changes in risk aversion ("risk" for short) in the determination of the term structure, equity prices, and risk premiums. Theoretically, we introduce persistent time-varying uncertainty about the fundamentals in an external habit model. The model matches the dynamics of dividend and consumption growth, including their volatility dynamics and many salient asset market phenomena. While the variation in dividend yields and the equity risk premium is primarily driven by risk, uncertainty plays a large role in the term structure and is the driver of counter-cyclical volatility of asset returns.

Keywords: Asset pricing; Risk; Uncertainty (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-ias
Date: 2005
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Related works:
Journal Article: Risk, uncertainty, and asset prices (2009) Downloads
Working Paper: Risk, Uncertainty and Asset Prices (2006) Downloads
Working Paper: Risk, Uncertainty and Asset Prices (2006) Downloads
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