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Valuation Risk Revalued

Oliver de Groot, Alexander Richter () and Nathaniel Throckmorton

No 201805, Discussion Paper Series, School of Economics and Finance from School of Economics and Finance, University of St Andrews

Abstract: This paper shows the recent success of valuation risk (time-preference shocks in Epstein- Zin utility) in resolving asset pricing puzzles rests sensitively on an undesirable asymptote that occurs because the preference specification fails to satisfy a key restriction on the weights in the Epstein-Zin time-aggregator. In a Bansal-Yaron long-run risk model, our revised valuation risk specification that satisfies the restriction provides a superior empirical fit. The results also show that valuation risk no longer has a major role in matching the mean equity premium and risk-free rate but is crucial for matching the volatility and autocorrelation of the risk-free rate.

Keywords: Epstein-Zin Utility; Valuation Risk; Equity Premium Puzzle; Risk-Free Rate Puzzle (search for similar items in EconPapers)
JEL-codes: D81 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-rmg and nep-upt
Date: 2018-12-17
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Working Paper: Valuation Risk Revalued (2018) Downloads
Working Paper: Valuation Risk Revalued (2018) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:san:wpecon:1805

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