Journal Article10.2139/SSRN.3575458
Nonlinear Dynamics in Conditional Volatility
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TL;DR: In this paper, the authors show that these quantitative results are almost exclusively driven by an inaccurate measure of conditional volatility, and that conditional volatility exhibits a strong procyclical pattern and the models do not deliver a sizeable variance risk premium in response to jumps in state variables.
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Abstract: Investors pay a substantial premium to hedge against fluctuations in volatility—the variance risk premium (VRP) The asset-pricing literature has presented numerous models with jumps in economic fundamentals to reproduce the properties and the time variation of the VRP This paper shows that these quantitative results are almost exclusively driven by an inaccurate measure of conditional volatility Solved accurately, conditional volatility exhibits—counterfactually—a strong procyclical pattern and the models do not deliver a sizeable VRP in response to jumps in state variables The notion that the VRP is purely a compensation for fluctuations in macroeconomic uncertainty does not hold
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Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework
Larry G. Epstein,Stanley E. Zin +1 more
TL;DR: In this paper, a class of recursive, but not necessarily expected utility, preferences over intertemporal consumption lotteries is developed, which allows risk attitudes to be disentangled from the degree of inter-temporal substitutability, leading to a model of asset returns in which appropriate versions of both the atemporal CAPM and the inter-time consumption-CAPM are nested as special cases.
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Business conditions and expected returns on stocks and bonds
Eugene F. Fama,Kenneth R. French +1 more
TL;DR: For example, this paper found that expected returns on common stocks and long-term bonds contain a term or maturity premium that has a clear business-cycle pattern (low near peaks, high near troughs).
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Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles
Ravi Bansal,Amir Yaron +1 more
TL;DR: The authors model consumption and dividend growth rates as containing a small long-run predictable component, and fluctuating economic uncertainty (consumption volatility), for which they provide empirical support, in conjunction with Epstein and Zin's (1989) preferences, can explain key asset markets phenomena.