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Investor Information, Long-Run Risk, and the Term Structure of Equity / Mariano M. Croce, Martin Lettau, Sydney C. Ludvigson.
- Format:
- Book
- Author/Creator:
- Croce, Mariano M.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w12912.
- NBER working paper series no. w12912
- Language:
- English
- Physical Description:
- 1 online resource: illustrations (black and white);
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 2007.
- Summary:
- We study the role of information in asset pricing models with long-run cash flow risk. When investors can distinguish short- from long-run consumption risks (full information), the model generates a sizable equity risk premium only if the equity term structure slopes up, contrary to the data. In general, the short- and long-run components are unidentified. We propose a sparsity-based bounded rationality model of long-run risk that is both parsimonious and fully identified from historical data. In contrast to full information, the model generates a sizable market risk premium simultaneously with a downward sloping equity term structure, as in the data.
- Notes:
- Print version record
- February 2007.
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