Valuation Risk and Asset Pricing

Rui Albuquerque, Martin Eichenbaum and Sergio Rebelo ()

No 18617, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Standard representative-agent models fail to account for the weak correlation between stock returns and measurable fundamentals, such as consumption and output growth. This failing, which underlies virtually all modern asset-pricing puzzles, arises because these models load all uncertainty onto the supply side of the economy. We propose a simple theory of asset pricing in which demand shocks play a central role. These shocks give rise to valuation risk that allows the model to account for key asset pricing moments, such as the equity premium, the bond term premium, and the weak correlation between stock returns and fundamentals.

JEL-codes: G12 (search for similar items in EconPapers)
Date: 2012-12
New Economics Papers: this item is included in nep-dge
Note: AP
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Citations: View citations in EconPapers (15)

Published as RUI ALBUQUERQUE & MARTIN EICHENBAUM & VICTOR XI LUO & SERGIO REBELO, 2016. "Valuation Risk and Asset Pricing," The Journal of Finance, vol 71(6), pages 2861-2904.

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Journal Article: Valuation Risk and Asset Pricing (2016)
Working Paper: Valuation Risk and Asset Pricing (2012)
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