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Valuation Risk and Asset Pricing

Author

Listed:
  • Eichenbaum, Martin
  • Rebelo, Sérgio
  • Albuquerque, Rui
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.

Suggested Citation

  • Eichenbaum, Martin & Rebelo, Sérgio & Albuquerque, Rui, 2012. "Valuation Risk and Asset Pricing," CEPR Discussion Papers 9262, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:9262
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    More about this item

    Keywords

    Bond yields; Equity premium; risk premium;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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