Valuation Risk and Asset Pricing

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

Research output: Contribution to journalArticlepeer-review

58 Scopus citations


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
Issue number6
StatePublished - Dec 1 2016

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics


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