Decision Frequency and Synchronization Across Agents: Implications for Aggregate Consumption and Equity Return

Lynch, Anthony W.

doi:10.1111/j.1540-6261.1996.tb04076.x

Cited by 119 publications

(80 citation statements)

References 43 publications

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“…7 In related work, Backus, Routledge, and Zin (2010) show that equity returns is a leading indicator of the business-cycle components of consumption and output growth. 8 Lynch (1996) and Gârleanu, Kogan, and Panageas (2012) provide interesting analyses of overlappinggenerations models which generate an equity premium, even though the correlation between consumption growth and equity returns is low. might be able to rationalize the low correlation between consumption and stock returns as a small-sample phenomenon.…”

Section: Resultsmentioning

confidence: 99%

Valuation Risk and Asset Pricing

Albuquerque¹,

Eichenbaum²,

Rebelo³

2012

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Standard representative-agent models fail to account for the weak correlation between stock returns and measurable fundamentals, such as consumption and output growth. This failing, which underlies virtually all modern asset-pricing puzzles, arises because these models load all uncertainty onto the supply side of the economy. We propose a simple theory of asset pricing in which demand shocks play a central role. These shocks give rise to valuation risk that allows the model to account for key asset pricing moments, such as the equity premium, the bond term premium, and the weak correlation between stock returns and fundamentals.

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Section: Resultsmentioning

confidence: 99%

Valuation Risk and Asset Pricing

Albuquerque¹,

Eichenbaum²,

Rebelo³

2012

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“…28 Attanasio, Banks and Tanner (2002), Brav, Constantinides and Geczy (2002), Brav and Geczy (1995), Mankiw andZeldes (1991), andVissing-Jorgensen (2002). 29 Gabaix and Laibson (2001), Heaton (1995), andLynch (1996). 30 The reader is also referred to the excellent surveys by Narayana Kocherlakota (1996), John Cochrane (1997) and by John Campbell (1999Campbell ( ,2001 (1981, p. 226).…”

Section: Estimating Equity Risk Premium Versus Estimating Risk Aversimentioning

confidence: 99%

The Equity Premium in Retrospect

2003

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“…15 Duffie and Sun (1990), Lynch (1996), and Gabaix and Laibson (2002) have all developed models where investors make infrequent portfolio decisions because of a fixed cost of information collection and decision making. discount puzzle.…”

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confidence: 99%

Rational Inattention: A Solution to the Forward Discount Puzzle

Bacchetta

Wincoop

2005

SSRN Journal

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The uncovered interest rate parity equation is the cornerstone of most models in international macro. However, this equation does not hold empirically since the forward discount, or interest rate differential, is negatively related to the subsequent change in the exchange rate. This forward discount puzzle implies that excess returns on foreign currency investments are predictable. Motivated by the fact that even today only a tiny fraction of foreign currency holdings are actively managed, we investigate to what extent incomplete information processing can explain this puzzle. Two types of incompleteness are considered: infrequent and partial information processing. We calibrate a two-country general equilibrium model to the data and show that incomplete information processing can fully match the empirical evidence. It can also account for several related empirical phenomena, including that of "delayed overshooting". We also show that incomplete information processing is optimal. Predictability is largely overshadowed by uncertainty about future exchange rates, so that the welfare gain from actively managing foreign exchange positions is small and easily outweighed by a small cost of active portfolio management.

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Decision Frequency and Synchronization Across Agents: Implications for Aggregate Consumption and Equity Return

Cited by 119 publications

References 43 publications

Valuation Risk and Asset Pricing

Valuation Risk and Asset Pricing

The Equity Premium in Retrospect

Rational Inattention: A Solution to the Forward Discount Puzzle

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