The Journal of Finance

Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles

Published: 11/27/2005   |   DOI: 10.1111/j.1540-6261.2004.00670.x

Ravi Bansal, Amir Yaron

We model consumption and dividend growth rates as containing (1) a small long‐run predictable component, and (2) fluctuating economic uncertainty (consumption volatility). These dynamics, for which we provide empirical support, in conjunction with Epstein and Zin's (1989) preferences, can explain key asset markets phenomena. In our economy, financial markets dislike economic uncertainty and better long‐run growth prospects raise equity prices. The model can justify the equity premium, the risk‐free rate, and the volatility of the market return, risk‐free rate, and the price–dividend ratio. As in the data, dividend yields predict returns and the volatility of returns is time‐varying.

Oil Futures Prices in a Production Economy with Investment Constraints

Published: 05/20/2009   |   DOI: 10.1111/j.1540-6261.2009.01466.x

LEONID KOGAN, DMITRY LIVDAN, AMIR YARON

We document a new stylized fact, that the relationship between the volatility of oil futures prices and the slope of the forward curve is nonmonotone and has a V‐shape. This pattern cannot be generated by standard models that emphasize storage. We develop an equilibrium model of oil production in which investment is irreversible and capacity constrained. Investment constraints affect firms' investment decisions and imply that the supply elasticity changes over time. Since demand shocks must be absorbed by changes in prices or changes in supply, time‐varying supply elasticity results in time‐varying volatility of futures prices. Estimating this model, we show it is quantitatively consistent with the V‐shape relationship between the volatility of futures prices and the slope of the forward curve.

How Risky Are U.S. Corporate Assets?

Published: 12/11/2022   |   DOI: 10.1111/jofi.13196

TETIANA DAVYDIUK, SCOTT RICHARD, IVAN SHALIASTOVICH, AMIR YARON

We use market data on corporate bonds and equities to measure the value of U.S. corporate assets and their payouts to investors. In contrast to equity dividends, total corporate payouts are highly volatile, turn negative when corporations raise capital, and are acyclical. At the same time, corporate asset returns are similar to returns on equity, and both are exposed to fluctuations in economic growth. To reconcile this evidence, we argue that acyclical but volatile net repurchases mask the exposure of total payouts' cash components to economic growth risks. We develop an asset pricing framework to quantitatively illustrate this economic channel.

Volatility, the Macroeconomy, and Asset Prices

Published: 09/30/2013   |   DOI: 10.1111/jofi.12110

RAVI BANSAL, DANA KIKU, IVAN SHALIASTOVICH, AMIR YARON

How important are volatility fluctuations for asset prices and the macroeconomy? We find that an increase in macroeconomic volatility is associated with an increase in discount rates and a decline in consumption. We develop a framework in which cash flow, discount rate, and volatility risks determine risk premia and show that volatility plays a significant role in explaining the joint dynamics of returns to human capital and equity. Volatility risk carries a sizable positive risk premium and helps account for the cross section of expected returns. Our evidence demonstrates that volatility is important for understanding expected returns and macroeconomic fluctuations.