EconPapers    
Economics at your fingertips  
 

Investor Information, Long-Run Risk, and the Term Structure of Equity

Mariano Croce (), Martin Lettau () and Sydney Ludvigson ()

No 12912, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the role of information in asset pricing models with long-run cash flow risk. When investors can distinguish short- from long-run consumption risks (full information), the model generates a sizable equity risk premium only if the equity term structure slopes up, contrary to the data. In general, the short- and long-run components are unidentified. We propose a sparsity-based bounded rationality model of long-run risk that is both parsimonious and fully identified from historical data. In contrast to full information, the model generates a sizable market risk premium simultaneously with a downward sloping equity term structure, as in the data.

JEL-codes: E44 G10 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn and nep-mac
Date: 2007-02
Note: AP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (43) Track citations by RSS feed

Published as Mariano M. Croce & Martin Lettau & Sydney C. Ludvigson, 2015. "Investor Information, Long-Run Risk, and the Term Structure of Equity," Review of Financial Studies, Society for Financial Studies, vol. 28(3), pages 706-742.

Downloads: (external link)
http://www.nber.org/papers/w12912.pdf (application/pdf)

Related works:
Journal Article: Investor Information, Long-Run Risk, and the Term Structure of Equity (2015) Downloads
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:nbr:nberwo:12912

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w12912

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2019-11-14
Handle: RePEc:nbr:nberwo:12912