Valuation risk revalued
Valuation risk revalued
This paper shows the success of valuation risk—time‐preference shocks in Epstein–Zin utility—in resolving asset pricing puzzles rests sensitively on the way it is introduced. The specification used in the literature is at odds with several desirable properties of recursive preferences because the weights in the time‐aggregator do not sum to one. When we revise the specification in a simple asset pricing model the puzzles resurface. However, when estimating a sequence of increasingly rich models, we find valuation risk under the revised specification consistently improves the ability of the models to match asset price and cash‐flow dynamics.</jats:p>
723-759
Groot, Oliver
0be49c71-aa34-43d6-80b7-89426334ecfc
Richter, Alexander W.
ec67d21a-6a26-4976-88ee-cf1c29477bbb
Throckmorton, Nathaniel A.
e01815cf-d5bb-4392-8094-ebef5357f9bc
May 2022
Groot, Oliver
0be49c71-aa34-43d6-80b7-89426334ecfc
Richter, Alexander W.
ec67d21a-6a26-4976-88ee-cf1c29477bbb
Throckmorton, Nathaniel A.
e01815cf-d5bb-4392-8094-ebef5357f9bc
Groot, Oliver, Richter, Alexander W. and Throckmorton, Nathaniel A.
(2022)
Valuation risk revalued.
Quantitative Economics, 13 (2), .
(doi:10.3982/qe1779).
Abstract
This paper shows the success of valuation risk—time‐preference shocks in Epstein–Zin utility—in resolving asset pricing puzzles rests sensitively on the way it is introduced. The specification used in the literature is at odds with several desirable properties of recursive preferences because the weights in the time‐aggregator do not sum to one. When we revise the specification in a simple asset pricing model the puzzles resurface. However, when estimating a sequence of increasingly rich models, we find valuation risk under the revised specification consistently improves the ability of the models to match asset price and cash‐flow dynamics.</jats:p>
Text
1627-7564-1-SP
- Version of Record
More information
Published date: May 2022
Identifiers
Local EPrints ID: 503743
URI: http://eprints.soton.ac.uk/id/eprint/503743
ISSN: 1759-7323
PURE UUID: be278241-89a7-43f6-b723-924e5f951289
Catalogue record
Date deposited: 12 Aug 2025 16:48
Last modified: 22 Aug 2025 02:49
Export record
Altmetrics
Contributors
Author:
Oliver Groot
Author:
Alexander W. Richter
Author:
Nathaniel A. Throckmorton
Download statistics
Downloads from ePrints over the past year. Other digital versions may also be available to download e.g. from the publisher's website.
View more statistics