Valuation Risk and Asset Pricing

Martin Eichenbaum, Sergio Rebelo () and Rui Albuquerque

No 9262, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Standard representative-agent models have difficulty in accounting for the weak correlation between stock returns and measurable fundamentals, such as consumption and output growth. This failing underlies virtually all modern asset-pricing puzzles. The correlation puzzle 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.

Keywords: Bond yields; Equity premium; risk premium (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2012-12
New Economics Papers: this item is included in nep-dge
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Citations: View citations in EconPapers (14)

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