This paper presents a consumption-based asset pricing model to explain the equity premium and riskfree puzzles as well as the predictability of returns in the international equity markets. We find that because the model entails idiosyncratic consumption risk which is higher than the aggregate consumption risk, the model helps lower the investor risk aversion needed to explain the mean equity pr...

We analyze the volatility risk premium by applying a modified two-pass Fama-MacBeth procedure to the returns of a large cross section of the returns of options on individual equities. Our results provide strong evidence of a volatility risk premium that is increasing in the level of overall market volatility. This risk premium provides compensation for risk stemming both from the characteristic...

To explain the low-frequency variation in US equity and debt returns in the 20th century, we solve an equilibrium model in which households face housing collateral constraints. An increase in the ratio of housing to human wealth loosens these borrowing constraints, thus allowing for more risk sharing. The rate of return that households require for holding equity decreases as a result. Feeding t...

An investment project may be capital constrained when its risk exceeds the limit of prospective investors. We propose a new equity-contract in which project’s performance-sharing across investors respects individual investor’s while staying as close possible to his/her percentage contribution equity project. The proposed arrangement thus ensures that with limits take less share performance duri...

We show that there can be significant difference between risk preferences of individual investors and aggregate preferences toward risk in the economy. To demonstrate this, we investigate aggregate properties of an economy where all investors have convex utility functions corresponding to risk seeking behavior. In the case of risk seeking individual agents with identical initial endowments, ass...

We propose a quantile regression approach to equity premium forecasting. Robust point forecasts are generated from a set of quantile forecasts, using both …xed and time-varying weighting schemes, thus exploiting the entire distributional information associated with each predictor. Further gains are achieved by incorporating the forecast combination methodology in our quantile regression setting...

This paper evaluates whether the medium-term risk of the stock market is sufficient to explain its high average rate of return relative to a risk-free investment. The medium-term risk of stocks is measured by the covariance of a market return over a quarter and consumption growth over horizons of one to three years. The medium-term risk of equity in aggregate consumption data is an order of mag...