Rational Pessimism, Rational Exuberance, and Asset Pricing Models
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estimates and examines the empirical plausibility of asset pricing models that attempt to explain features of financial markets such as the size of the equity premium and the volatility of the stock market. In one model, the long-run risks (LRR) model of Bansal and Yaron, low-frequency movements, and time-varying uncertainty in aggregate consumption growth are the key channels for understanding asset prices. In another, as typified by Campbell and Cochrane, habit formation, which generates time-varying risk aversion and consequently time variation in risk premia, is the key channel. These models are fitted to data using simulation estimators. Both models are found to fit the data equally well at conventional significance levels, and they can track quite closely a new measure of realized annual volatility. Further, scrutiny using a rich array of diagnostics suggests that the LRR model is preferred.
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J.B. Fuqua Distinguished Professor of Business Administration
Prof. Ravi Bansal is J.B. Fuqua Professor of Finance and Economics at Duke University and Research Associate at the NBER. He is a leader in the fields finance and macroeconomics and has published extensively in leading journals such as the Journal of Finance, American Economic Review and the Journal of Political Economy. His research provides new insights about the connections between economic growth and uncertainty to bond, equity, and currency markets. His pioneering work on identifying risks
William Henry Glasson Distinguished Professor of Economics
George Tauchen is the William Henry Glasson Professor of Economics and professor of finance at the Fuqua School of Business. He joined the Duke faculty in 1977 after receiving his Ph.D. from the University of Minnesota. He did his undergraduate work at the University of Wisconsin. Professor Tauchen is a fellow of the Econometric Society, the American Statistical Association, the Journal of Econometrics, and the Society for Financial Econometrics (SoFie). He is also the 2003 Duke University Sc
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