The forward- and the equity-premium puzzles: two symptoms of the same illness?


Autoria(s): Costa, Carlos Eugênio da; Issler, João Victor; Matos, Paulo Rogério Faustino
Data(s)

05/11/2010

05/11/2010

05/11/2010

Resumo

Using information on US domestic financial data only, we build a stochastic discount factor—SDF— and check whether it accounts for foreign markets stylized facts that escape consumption based models. By interpreting our SDF as the projection of a pricing kernel from a fully specified model in the space of returns, our results indicate that a model that accounts for the behavior of domestic assets goes a long way toward accounting for the behavior of foreign assets prices. We address predictability issues associated with the forward premium puzzle by: i) using instruments that are known to forecast excess returns in the moments restrictions associated with Euler equations, and; ii) by pricing Lustig and Verdelhan (2007)’s foreign currency portfolios. Our results indicate that the relevant state variables that explain foreign-currency market asset prices are also the driving forces behind U.S. domestic assets behavior.

Identificador

0104-8910

http://hdl.handle.net/10438/7718

Idioma(s)

en_US

Publicador

Fundação Getulio Vargas. Escola de Pós-graduação em Economia

Relação

Ensaios Econômicos;712

Palavras-Chave #Equity premium puzzle #Forward premium puzzle #Return-based pricing kernel #Risco (Economia) - Modelos econométricos #Economia
Tipo

Working Paper