Stochastic Volatility, Long Run Risks, And Aggregate Stock Market Fluctuations

What are the main drivers of fluctuations in the aggregate US stock market? In this paper, the authors attempt to resolve the long-lasting debate surrounding this question by designing and solving a consumption-based asset pricing model which incorporates stochastic volatility, long-run risks in consumption and dividends, and Epstein-Zin preferences. These results indicate that, over short and medium horizons, fluctuations in the level of the aggregate US stock market are mainly driven by changes in expected excess returns.

Provided by: Bank for International Settlements Topic: Big Data Date Added: Oct 2010 Format: PDF

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