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Macroeconomic Tail Risks and Asset Prices

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  • David Schreindorfer
  • Stijn Van Nieuwerburgh

Abstract

I document that dividend growth and returns on the aggregate U.S. stock market are more correlated with consumption growth in bad economic times. In a consumption-based asset pricing model with a generalized disappointment-averse investor and small, IID consumption shocks, this feature results in a realistic equity premium despite low risk aversion. The model is consistent with the main facts about stock market risk premiums inferred from equity index options, remains tightly parameterized, and allows for analytical solutions for asset prices. An extension with non-IID dynamics accounts for excess volatility and return predictability, while preserving the model’s consistency with option moments.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • David Schreindorfer & Stijn Van Nieuwerburgh, 2020. "Macroeconomic Tail Risks and Asset Prices," The Review of Financial Studies, Society for Financial Studies, vol. 33(8), pages 3541-3582.
    • Handle: RePEc:oup:rfinst:v:33:y:2020:i:8:p:3541-3582.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhz105
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    Cited by:

    1. Geert Bekaert & Eric Engstrom & Andrey Ermolov, 2023. "The Variance Risk Premium in Equilibrium Models," Review of Finance, European Finance Association, vol. 27(6), pages 1977-2014.
    2. Chen, Qi-An & Li, Huashi & Lin, Jianyi & Yan, Youliang, 2023. "Asset pricing with two types of heterogeneous consumption volatilities in mind: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    3. Salisu, Afees A. & Ogbonna, Ahamuefula E. & Vo, Xuan Vinh, 2023. "Oil tail risks and the realized variance of consumer prices in advanced economies," Resources Policy, Elsevier, vol. 83(C).
    4. Bollerslev, Tim & Todorov, Viktor, 2023. "The jump leverage risk premium," Journal of Financial Economics, Elsevier, vol. 150(3).
    5. Kroencke, Tim A., 2022. "Recessions and the stock market," Journal of Monetary Economics, Elsevier, vol. 131(C), pages 61-77.

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