Time-varying consumption correlation and the dynamics of the equity premium evidence from the G-7 Countries by Asani Sarkar

Cover of: Time-varying consumption correlation and the dynamics of the equity premium | Asani Sarkar

Published by Federal Reserve Bank of New York in [New York, N.Y.] .

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Places:

  • Group of Seven countries

Subjects:

  • Stocks -- Prices -- Group of Seven countries -- Mathematical models.,
  • Stocks -- Rate of return -- Group of Seven countries -- Mathematical models.,
  • Risk -- Group of Seven countries -- Mathematical models.,
  • Consumption (Economics) -- Group of Seven countries -- Mathematical models.

Edition Notes

Book details

StatementAsani Sarkar, Lingjia Zhang.
SeriesStaff reports ;, no. 181, Staff reports (Federal Reserve Bank of New York : Online) ;, no. 181.
ContributionsZhang, Lingjia., Federal Reserve Bank of New York.
Classifications
LC ClassificationsHB1
The Physical Object
FormatElectronic resource
ID Numbers
Open LibraryOL3476177M
LC Control Number2005615635

Download Time-varying consumption correlation and the dynamics of the equity premium

The low unconditional correlation between returns and consumption growth observed in the data has prompted some authors to find alternatives to aggregate consumption risk for explaining risk and returns.

However, our results show that time-varying consumption risk retains an important role for understanding the dynamics of the equity by: 4. We examine the implications of time variation in the correlation between the equity premium and nondurable consumption growth for equity return dynamics in G-7 countries.

Using a VAR-GARCH (1,1) model, we find that the correlation increases with recession indicators such as above-average unemployment growth and with proxies for stock market wealth. We examine the implications of time-varying correlation between the equity premium and nondurable consumption growth on equity return dynamics of G7 countries.

Using a VAR-GARCH(1,1) model, we find that the correlation increases with recession indicators, such as above average unemployment growth, and with proxies for stock market wealth.

Downloadable. We examine the implications of time variation in the correlation between the equity premium and nondurable consumption growth for equity return dynamics in G-7 countries.

Using a VAR-GARCH (1,1) model, we find that the correlation increases with recession indicators such as above-average unemployment growth and with proxies for stock market by: 1. Time-varying consumption correlation and the dynamics of the equity premium: evidence from the G-7 countries Article January with 19 Reads How we measure 'reads'.

Time Varying Consumption Correlation and the Dynamics of the Equity Premium: Evidence from the G7 Countries By Asani Sarkar, Lingjia Zhang, Arturo Estrella, Charles Himmelberg, Sydney Ludvigson and Anthony Rodrigues. We examine the implications of time variation in the correlation between the equity premium and nondurable consumption growth for equity return dynamics in G-7 countries.

Using a VAR-GARCH (1,1) model, we find that the correlation increases with recession indicators such as above-average unemployment growth and with proxies for stock market : Asani Sarkar and Lingjia Zhang. more, dynamic relations between time-varying equity premium and market volatility are explicitly derived from the correlation structure.

A reconciliation of the debate regarding the leverage and volatility feedback effects is rendered through this mod-eling. In the empirical analysis of this model, we find that a suitable volatility indicator,Cited by: 1. Asset Prices, Consumption, and the Business Cycle that an extremely volatile stochastic discount factor is required to match the ratio of the equity premium to the standard deviation of stock returns (the Sharpe ratio of the stock market).

mium dynamics are endogenous to the macroeconomic effects of a short-term monetary policy shock. Intuitively, as consumption falls towards habit, investors become more risk averse and require a Time-varying consumption correlation and the dynamics of the equity premium book risk premium for holding stocks.

The model can also match the empirical relationship. return dynamics. In particular, we find the time-series properties of our model generated equity premium, which may be regarded as an index measure of re-vealed uncertainty, relates closely to those of the macroeconomic uncertainty in-dices developed recently in Jurado, Ludvigson, and Ng () and Carriero, Clark, and Marcellino (forthcoming).Cited by: 5.

This implies that the equity premium associated with jumps is about % per annum on average. All higher-order moments can be affected by jumps to returns. According to our parameter estimates, on average, jumps contribute % to the equity premium through the Cited by: The correlation puzzle The covariance and correlation between stock returns and measurable fundamentals, especially consumption, is weak at the 1, 5, and 10 year horizons.

This fact underlies virtually all modern asset-pricing puzzles. The equity premium puzzle. Time-Varying Consumption Correlation and the Dynamics of the Equity Premium: Evidence from the G-7 Countries Asani Sarkar and Lingjia Zhang Federal Reserve Bank of New York Staff Reports, no.

April JEL classification: G12, G15 Abstract We examine the implications of time variation in the correlation between the equity. The views expressed in the paper are those of the authors and are not necessarily reflective of views at the Federal Reserve Bank of New York or the Federal Reserve System.

Any errors or omissions are the responsibility of the authors. Time-Varying Consumption Correlation and the Dynamics of the Equity Premium.

Time-Varying Information Quality and Asset Prices James Yae∗ Decem Abstract The quality of information about the macro-economy is an important determinant of the equity premium.

However, the empirical relationship between information quality and the equity premium has been obscured by the difficulty of measuring time-varying. utility: risk-neutral with non-negative consumption, and logarithmic. Our model yields new insights on the dynamics of risk-sharing and insurance provision.

The 1A growing empirical literature documents the relationship between the capital of liquidity providers, the liquidity that these agents provide to other participants, and assets’ risk. Downloadable. In a parsimonious regime switching model, expected consumption growth varies over time.

Adding in ation as a conditioning variable, we uncover two states in which expected consumption growth is low, one with high and one with negative expected in ation. Embedded in a general equilibrium asset pricing model with learning, these dynamics replicate the observed time variation in Author: Ilya Dergunov, Christoph Meinerding, Christian Schlag.

exhibit asymmetry in conditional correlation, although in systematically different manners. The paper also examines the strong worldwide linkages in the dynamics of volatility and correlation, finding subtle but important differences between equity and bond second moment dynamics.

It is. The true data-generating process for aggregate consumption is modeled as follows:IA.1 dc t = (1 2 ˙2 c+ x t)dt+ ˙ cdB c;t (IA.A1) dx t = xx tdt+ ˙ cdB x;t: (IA.A2) The time-varying expected growth rate + x t follows the speci cation of Campbell (, ).

This equity premium consists of a % consumption-risk premium, a % event-risk premium, and a % corporate-risk premium. Note that the total equity premium implied by this calibration is more than six times as large as the traditional Mehra and Prescott () equity premium (given by the first or consumption-risk component).Cited by: Du ee () puzzle.

Overall, this article shows that time-varying market participation rather than time-varying individual risk aversion is crucial in explaining the dynamics of equity premium and volatility. JEL Classi cation: G11, G12, G17 Keywords: Time-varying market participation, Consumption Risk, Heterogeneous agents, Conditional asset.

Time-Varying Risk Premiums and the Output Gap. on Treasury bonds that is not due to time-varying risk premium. that the relationship between the dynamics of US dollar and S & P index. documented value premium is justified in a rational asset pricing framework by time-varying conditional betas of value and growth stocks over the business cycle.

Finally, Moskowitz () finds that the size premium is related to volatility and covariances while no such relation is present for the book-to-market and the momentum premium. Abstract. Correlations between different asset returns represent a crucial element in assets allocation decisions and financial engineering.

In commodity markets, where prices result non stationary and returns are only mean stationary, a time varying measure of correlation has to be : Rita Laura D'ecclesia, Denis Kondi.

Time‐Varying Risk Premium in Large Cross‐Sectional Equity Data Sets. Patrick Gagliardini. E-mail address: [email protected] Faculty of Economics, Università della Svizzera Italiana (USI), Via Bu CH‐ Lugano, Switzerland We estimate the time‐varying risk premia implied by conditional linear asset pricing models Cited by: Modeling the Dynamics of Correlations Among International Equity Volatility Indices Abstract.

This study introduces a one factor model to examine the correlation of volatility markets. We show that for markets where there is a higher level of stock market integration.

Arbitrage, State Prices and Portfolio Theory / Philip h. Dybvig and Stephen a. Ross / - Intertemporal Asset Pricing Theory / Darrell Duffle / - Tests of Multifactor Pricing Models, Volatility Bounds and Portfolio Performance / Wayne E.

Ferson / - Consumption-Based Asset Pricing / John y Campbell / - The Equity Premium in Retrospect / Rainish Mehra and Edward c. Prescott / - Anomalies and 4/5(1). Time Variation in the Equity Risk Premium The equity risk premium (ERP) refers to the expected (and sometimes realized) return of a broad equity index in excess of some fixed-income alternative.

In the past decade, investors have shifted their thinking about whether to use historical average returns or forward-looking valuation indicators in. Abstract. Motivated by the implications from a stylized self-contained general equilibrium model incorporating the effects of time-varying economic uncertainty, we show that the difference between implied and realized variation, or the variance risk premium, is able to explain a nontrivial fraction of the time-series variation in post aggregate stock market returns, with high (low) Cited by: Equity premium abstract This paper investigates whether risks associated with time-varying arrival of jumps and their effect on the dynamics of higher moments of returns are priced in the conditional mean of daily market excess returns.

We find that jumps and jump dynamics are significantly related to the market equity premium. force behind the time-varying correlation structure.

My model, therefore, explicitly utilizes this concept of liquidity volatility, combined with the long run risk framework byBansal and Yaron(), to nd a solution to the time-varying correlation structure.

The model intuition is as follows. Barclays Capital provides an overview of the equity derivatives flows and products that contribute to dealers’ correlation exposures, presenting several strategies that allow investors, of all types, to take advantage of the resultant opportunities Equity correlation – explaining the investment opportunity Source: Barclays Capital X (%.

choice when investment opportunities are time varying. To name a few, Kim and Omberg (), Campbell and Viceira () and Campbell et al. () analyze intertemporal consumption and portfolio choice when the risk premium of a risky asset follows a mean-reverting process.

In those. Our new model of consumption-based habit generates time-varying risk premia on bonds and stocks from loglinear, homoskedastic macroeconomic dynamics. Consumers’ rst-order con-dition for the real risk-free bond generates an exactly loglinear consumption Euler equation, commonly assumed in New Keynesian models.

We estimate that the correlation File Size: KB. The Price of Correlation Risk: Evidence from Equity Options JOOST DRIESSEN, PASCAL J. MAENHOUT, and GRIGORY VILKOV∗ ABSTRACT We study whether exposure to marketwide correlation shocks affects expected option returns, using data on S&P index options, options on all components, and stock returns.

real consumption growth lowers this premium by about %. Unlike the equity premium, there is only mixed evidence suggesting that the expected value premium has declined over time.

∗Department of Finance, Eli Broad College of Business, Michigan State University. Tail Risk and Equity Risk Premia Wachter () uses a jump process to model the disaster events for consumption and she shows that the equity risk premium depends on the time-varying jump risk. Drechsler and Yaron () assume the consumption growth process is smooth, but the volatility of short-run consumption growth is exposed to a.

Estimating the Equity Premium John Y. Campbell. NBER Working Paper No. Issued in September NBER Program(s):Asset Pricing Program, Monetary Economics Program To estimate the equity premium, it is helpful to use finance theory: not the old-fashioned theory that efficient markets imply a constant equity premium, but theory that restricts the time-series behavior of valuation ratios.

consumption growth and asset returns, these models generally predict a counter-cyclical risk premium (e.g., Campbell and Cochrane, ; Melino and Yang, ). On an intuitive level, the cycle that one refers to is the business cycle.

However, the equity premium generated by. consumption innovation is the asset’s cash flow beta. Using data on consumption and dividends, we directly measure cash flow betas for 30 equity portfolios: 10 size, 10 book-to-market, and 10 momentum sorted portfolios.

We show that the cross-sectional dispersion in .model with exogenous variables to link the impact of two relevant variables on the time-varying correlation. This paper is organized as follows. Section 2 presents the DCC model with exogenous variables. Section 3 specifies the time-varying correlation model of foreign exchange and excess equity returns.

Section 4 discusses the data.equity, and the cross-sectional dispersion in risk premia. In our dynamic asset-pricing model with time-varying macroeconomic volatility (which we refer to as Macro-DCAPM-SV model), the stochastic discount factor and, therefore, the risk premium are determined by three sources of risks: cash-flow, discount-rate and volatility Size: KB.

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