Risk, uncertainty, and asset prices

Geert Bekaert, Eric Engstrom and Yuhang Xing

Journal of Financial Economics, 2009, vol. 91, issue 1, 59-82

Abstract: We identify the relative importance of changes in the conditional variance of fundamentals (which we call "uncertainty") and changes in risk aversion 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 price-dividend ratios and the equity risk premium is primarily driven by risk aversion, uncertainty plays a large role in the term structure and is the driver of countercyclical volatility of asset returns.

Keywords: Equity; premium; Economic; uncertainty; Stochastic; risk; aversion; Time; variation; in; risk; and; return; Excess; volatility; External; habit; Term; structure; Heteroskedasticity (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (177)

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Related works:
Working Paper: Risk, Uncertainty and Asset Prices (2006)
Working Paper: Risk, Uncertainty and Asset Prices (2006)
Working Paper: Risk, uncertainty, and asset prices (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:91:y:2009:i:1:p:59-82

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