The DOI matches its Crossref record; 61 of the 61 references it cites were found in a registry or an index.
The Declining Equity Premium: What Role Does Macroeconomic Risk Play?
Open accessAbstract
Aggregate stock prices, relative to virtually any indicator of fundamental value, soared to unprecedented levels in the 1990s. Even today, after the market declines since 2000, they remain well above historical norms. Why? We consider one particular explanation: a fall in macroeconomicrisk, or the volatility of the aggregate economy. Empirically, we find a strong correlation between low-frequency movements in macroeconomic volatility and low-frequency movements in the stock market. To model this phenomenon, we estimate a two-state regime switching model for the volatility and mean of consumption growth, and find evidence of a shift to substantially lower consumption volatility at the beginning of the 1990s. We then use these estimates from postwar data to calibrate a rational asset pricing model with regime switches in both the mean and standard deviation of consumption growth. Plausible parameterizations of the model are found to account for a significant portion of the run-up in asset valuation ratios observed in the late 1990s.
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Cites
A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle
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Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles
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Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?
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Disappearing dividends: changing firm characteristics or lower propensity to pay?
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Cited by
Measuring and Modeling Variation in the Risk-Return Trade-off
Lettau, M., & Ludvigson, S. C. (2010) · Handbook of Financial Econometrics: Tools and Techniques · doi:10.1016/b978-0-444-50897-3.50014-6 · Cited by 409
Self-citationBond risk, bond return volatility, and the term structure of interest rates
Viceira, L. M. (2012) · International Journal of Forecasting · doi:10.1016/j.ijforecast.2011.02.018 · Cited by 136
Metadata
- Authors
- Lettau, M., Ludvigson, S. C., & Wachter, J. A.
- Venue
- Review of Financial Studies
- Publisher
- Oxford University Press (OUP)
- Published
- 2007-04-12
- Volume
- 21
- Issue
- 4
- Pages
- 1653-1687
- ISSN
- 0893-9454 (ISSN-L)
- 1465-7368
- OpenAlex
- W3123646285
- Cited by
- 375
- References
- 61
- FWCI
- 49.01
- Type
- journal article
- Language
- en
- Open access
- bronze
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