The Forward- and the Equity-Premium Puzzles: Two Symptoms of the Same Illness?
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 comparing this out-of-sample results with the one obtained performing an in-sample exercise, where the return-based SDF captures sources of risk of a representative set of developed and emerging economies government bonds. 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.
Year of publication: |
2012-04-24
|
---|---|
Authors: | Costa, Carlos Eugênio da ; Issler, João Victor ; Matos, Paulo F. |
Institutions: | FGV/EPGE Escola Brasileira de Economia e Finanças, Fundação Getulio Vargas (FGV) |
Saved in:
freely available
Extent: | application/pdf |
---|---|
Series: | Economics Working Papers (Ensaios Economicos da EPGE). - ISSN 0104-8910. |
Type of publication: | Book / Working Paper |
Notes: | Number 732 |
Source: |
Persistent link: https://www.econbiz.de/10011129038
Saved in favorites
Similar items by person
-
The Forward- and the Equity-Premium Puzzles: Two Symptoms of the Same Illness?
Costa, Carlos Eugênio da, (2009)
-
Costa, Carlos Eugênio da, (2013)
-
The Forward- and the Equity-Premium Puzzles: Two Symptoms of the Same Illness?
Matos, Paulo, (2007)
- More ...