Valuation Risk and Asset Pricing

Rui Albuquerque, Martin Eichenbaum, Victor Xi Luo, Sergio Rebelo

Research output: Contribution to journalArticle

27 Scopus citations

Abstract

Standard representative-agent models fail to account for the weak correlation between stock returns and measurable fundamentals, such as consumption and output growth. This failing, which underlies virtually all modern asset pricing puzzles, arises because these models load all uncertainty onto the supply side of the economy. We propose a simple theory of asset pricing in which demand shocks play a central role. These shocks give rise to valuation risk that allows the model to account for key asset pricing moments, such as the equity premium, the bond term premium, and the weak correlation between stock returns and fundamentals.

Original languageEnglish (US)
Pages (from-to)2861-2904
Number of pages44
JournalJournal of Finance
Volume71
Issue number6
DOIs
StatePublished - Dec 1 2016

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

Fingerprint Dive into the research topics of 'Valuation Risk and Asset Pricing'. Together they form a unique fingerprint.

  • Cite this