Risk, uncertainty, and asset prices

By Geert Bekaert, Eric C. Engstrom, Yuhang Xing. 2005

393 citations recorded by the source corpus.

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

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/c349c254e5e1d73f0b170d0a3317694cb9704a8c

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Citations in the corpus

Time-varying short-horizon predictability ☆ (2008, background): “(2004), and Bekaert et al. (2009) show that risk premiums are countercyclical, and that the timeseries behavior of risk premiums governs at least some return predictability.”
Appendix: Monetary Policy Drivers of Bond and Equity Risks (2020, neutral): “Endogenous responses of bond risk premia amplify these effects of monetary policy on bond risks.”
The Wealth-Consumption Ratio (2008, neutral): “Bansal, Dittmar, and Lundblad (2005), Bekaert, Engstrom, and Grenadier (2005) and Bekaert, Engstrom, and Xing (2008) consider versions of the LRR model with cointegration. that is linear in st − s̄.”
Inflation Bets or Deflation Hedges? The Changing Risks of Nominal Bonds (2013, neutral): “One modelling strategy would be to specify a dividend process and solve for the stock return endogenously in the manner of Mamaysky (2002), Bekaert et al. (2005), and dAddona and Kind (2006).”
Asset pricing tests with long run risks in consumption growth (2011, neutral): “(11) Now, substituting the log-a¢ ne approximation for rc;t+1 in equation (5) into the expression for the pricing kernel (equation (4)), and noting that zt is given by equation (7), we have,”
Stock Return Predictability and Variance Risk Premia: Statistical Inference and International Evidence (2011, background): “Alternatively, the global variance risk premium may be interpreted as a measure of aggregate risk aversion (e.g., Bekaert, Engstrom, and Xing (2009)) or a summary measure of worldwide disagreements in beliefs (e.g., Buraschi et al. (2014)).”
Does Idiosyncratic Volatility Proxy for Risk Exposure (2012, methodology): “For example, Bekaert et al. (2009) show that countercyclical changes in the variance of consumption growth drive the countercyclical volatility of aggregate returns.18 Motivated by their model and the observation that AV tends to increase in recessions (see Figure 1), we examine the relation…”
Relationship between gold and stock markets during the global financial crisis: Evidence from nonlinear causality tests (2015, methodology): “According to the consumption-based asset-pricing literature (e.g. Barsky 1989; Bekaert et al., 2009 and Baele et al., 2013) a flight to safety (quality) is typically defined as the joint occurrence of higher economic uncertainty with lower equity prices (through a cash flow or risk premium effect)…”
The Cross-Section and Time-Series of Stock and Bond Returns (2017, neutral): “Cochrane and Piazzesi (2005) show that a tent-shaped function of 5 forward rates forecasts not only nominal returns on bonds, but also has some forecasting ability for future aggregate stock market returns.”