Asset pricing under uncertainty about shock propagation : [version 18 november 2013]

  • We analyze the equilibrium in a two-tree (sector) economy with two regimes. The output of each tree is driven by a jump-diffusion process, and a downward jump in one sector of the economy can (but need not) trigger a shift to a regime where the likelihood of future jumps is generally higher. Furthermore, the true regime is unobservable, so that the representative Epstein-Zin investor has to extract the probability of being in a certain regime from the data. These two channels help us to match the stylized facts of countercyclical and excessive return volatilities and correlations between sectors. Moreover, the model reproduces the predictability of stock returns in the data without generating consumption growth predictability. The uncertainty about the state also reduces the slope of the term structure of equity. We document that heterogeneity between the two sectors with respect to shock propagation risk can lead to highly persistent aggregate price-dividend ratios. Finally, the possibility of jumps in one sector triggering higher overall jump probabilities boosts jump risk premia while uncertainty about the regime is the reason for sizeable diffusive risk premia.

Download full text files

Export metadata

Additional Services

Share in Twitter Search Google Scholar
Metadaten
Author:Nicole BrangerORCiDGND, Patrick Grüning, Holger KraftGND, Christoph MeinerdingORCiDGND, Christian Schlag
URN:urn:nbn:de:hebis:30:3-324374
DOI:https://doi.org/10.2139/ssrn.2360455
Parent Title (German):SAFE working paper series ; No. 34
Series (Serial Number):SAFE working paper series (34)
Publisher:SAFE
Place of publication:Frankfurt am Main
Document Type:Working Paper
Language:English
Year of Completion:2013
Year of first Publication:2013
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2013/12/10
Tag:Filtering; Recursive Utility
Contagion Risk; General Equilibrium; Partial Information
Issue:version 18 november 2013
Page Number:67
Last Page:62
HeBIS-PPN:348861133
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht