Asset Pricing.

PositionProgram and Working Group Meetings

NBER's Program on Asset Pricing met on November 21 in Cambridge. Organizers Monika Piazzesi, Stanford University and NBER, and Stijn Van Nieuwerburgh, New York University and NBER, chose the following papers to discuss:

Eric Swanson and Glenn Rudebusch, Federal Reserve Bank of San Francisco, "The Bond Premium in a DSGE Model with Long-Run Real and Nominal Risks"

Discussant: Stanley E. Zin, Carnegie Mellon University and NBER

Itamar Drechsler, University of Pennsylvania, and Amir Yaron, University of Pennsylvania and NBER, "What's Vol Got to Do With It?"

Discussant: Lars P. Hansen, University of Chicago and NBER

Akub Jurek, Princeton University, "Crash-Neutral Currency Carry Trades" Discussant: Adrian Verdelhan, Boston University

Santiago Bazdrech and Frederico Belo, University of Minnesota, and Xiaoji Lin, London School of Economics, "Labor Hiring, Investment, and Stock Return Predictability in the Cross Section"

Discussant: Francois Gourio, Boston University

Martijn Cremers and Antti Petajisto, Yale University, and Eric Zitzewitz, Dartmouth College, "Should Benchmark Indices Have Alpha? Revisciting Performance Evaluation"

Discussant: Lubos Pastor, University of Chicago and NBER

John Y. Campbell and Luis M. Viceira, Harvard University and NBER, and Adi Sunderam, Harvard University, "Inflation Bets or Deflation Hedges ? The Changing Risks of Nominal Bonds"

Discussant: George Tauchen, Duke University

The term premium on nominal long-term bonds in the standard dynamic stochastic general equilibrium (DSGE) model used in macroeconomics is far too small and stable relative to empirical measures obtained from the data--an example of the "bond premium puzzle." However, in models of endowment economies, researchers have been able to generate reasonable term premiums by assuming that investors have recursive Epstein-Zin preferences and face long-run economic risks. Rudebusch and Swanson show that introducing Epstein-Zin preferences into a canonical DSGE model can also produce a large and variable term premium without compromising the model's ability to fit key macroeconomic variables. Long-run real and nominal risks further improve the model's ability to fit the data with a lower level of household risk aversion.

Uncertainty plays a key role in economics, finance, and decision sciences. Financial markets, and in particular derivative markets, provide fertile ground for understanding how perceptions of economic uncertainty and cash-flow risk manifest...

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