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APT-1: Equilibrium Models in Asset Pricing
Q: Risk, Rents, or Growth?
1Rotman School of Management, Canada; 2London Business School; 3Fuqua School of Business, Duke University
In this paper, we ask: what drives the recent rises in aggregate valuation ratios, such as Tobin's Q or price-dividend ratios? Is it revised growth expectations, rising corporate profits induced by movements in market power, or changes in risk and risk premia? We provide a structural decomposition of these forces based on an estimated innovation-based endogenous growth model with realistic aggregate risk premia and endogenous markups. The baseline estimates suggest a critical role of changes in market structure and declines in competition in recent years in shaping i) a secular decline in growth rates, with weakened investment and innovation, and ii) rises in aggregate volatility and risk premia. Our results highlight the relevance of endogenous links between market power, future growth, and risk, absent in standard stochastic growth models. These tensions are amplified in the presence of nominal rigidities and help rationalize missing inflation and rising valuations in bond markets in recent years. Using our framework, we provide novel estimates of future growth and risk prospects conditional on the current macroeconomic environment.
Fuel is Pumping Premiums: A Consumption-based Explanation of the Value Anomaly
1Ross School of Business, University of Michigan; 2Goethe University Frankfurt, Germany; 3SAFE; 4Karlsruhe Institute of Technology
The standard approach in empirical consumption-based asset pricing to use nondurables and services as a proxy for consumption appears inappropriate. We estimate substitution elasticities between different consumption bundles and show that households cannot substitute gasoline consumption by consumption of other nondurable goods or services. As a consequence, gasoline consumption shows up as a separate factor in the pricing kernel. Cross-sectional variation in gasoline consumption betas explains a large part of the value premium. Value stocks are typically more energy-intensive than growth stocks and thus riskier, since they suffer more from the gasoline supply shocks that also affect households.
Parameter Learning in Production Economies
1CERGE-EI; 2University of Warwick
We examine how parameter learning amplifies the impact of macroeconomic shocks on equity prices and quantities in a standard production economy where a representative agent has Epstein-Zin preferences. An investor observes technology shocks which follow a regime-switching process but does not know the underlying model parameters governing the short-term and long-run perspectives of economic growth. We show that rational parameter learning endogenously generates long-run productivity and consumption risks that help explain a wide array of dynamic pricing phenomena. The asset pricing implications of subjective long-run risks crucially depend on the introduction of a procyclical dividend process consistent with the data.