Interpretable Asset Markets?

40 Pages Posted: 19 Dec 2002 Last revised: 21 Feb 2021

See all articles by Ravi Bansal

Ravi Bansal

Duke University and NBER

Varoujan Khatchatrian

Duke University, Fuqua School of Business-Economics Group

Amir Yaron

University of Pennsylvania -- Wharton School of Business; National Bureau of Economic Research (NBER)

Date Written: December 2002

Abstract

In this paper we show that measures of economic uncertainty (conditional volatility of consumption) predict and are predicted by valuation ratios at long horizons. Further we document that asset valuations drop as economic uncertainty rises that is, financial markets dislike economic uncertainty. Moreover, future earnings growth rates are sharply predicted by current price-earnings ratios. It seems that much of the variation in asset prices can be attributed to fluctuations in economic uncertainty and expected cash-flow growth. This empirical evidence is consistent with the implications of existing parametric general equilibrium models. Hence, the channels of fluctuating economic uncertainty and expected growth seem important for interpreting asset markets.

Suggested Citation

Bansal, Ravi and Khatchatrian, Varoujan and Yaron, Amir, Interpretable Asset Markets? (December 2002). NBER Working Paper No. w9383, Available at SSRN: https://ssrn.com/abstract=362065

Ravi Bansal

Duke University and NBER ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7758 (Phone)
919-660-8038 (Fax)

Varoujan Khatchatrian

Duke University, Fuqua School of Business-Economics Group ( email )

Box 90097
Durham, NC 27708-0097
United States

Amir Yaron (Contact Author)

University of Pennsylvania -- Wharton School of Business ( email )

The Wharton School
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Philadelphia, PA 19104
United States
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215-898-6200 (Fax)

National Bureau of Economic Research (NBER) ( email )

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