TY  - JOUR
AU  - Bansal,Ravi
AU  - Gallant,A. Ronald
AU  - Tauchen,George
TI  - Rational Pessimism, Rational Exuberance, and Asset Pricing Models
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13107
PY  - 2007
Y2  - May 2007
UR  - http://www.nber.org/papers/w13107
L1  - http://www.nber.org/papers/w13107.pdf
N1  - Author contact info:
Ravi Bansal
Fuqua School of Business
Duke University
1 Towerview Drive
Durham, NC 27708
Tel: 919/660-7758
Fax: 919/660-8038
E-Mail: ravi.bansal@duke.edu

A. Ronald Gallant
Fuqua School of Business
Duke University
1 Towerview Drive
Durham, NC 27708
E-Mail: ron.gallant@duke.edu

George Tauchen
Department of Economics
Duke University
Durham, NC 27708
E-Mail: george.tauchen@duke.edu
AB  - The paper estimates and examines the empirical plausibiltiy of asset pricing models that attempt to explain features of financial markets such as the size of the equity premium and the volatility of the stock market. In one model, the long run risks model of Bansal and Yaron (2004), low frequency movements and time varying uncertainty in aggregate consumption growth are the key channels for understanding asset prices. In another, as typified by Campbell and Cochrane (1999), habit formation, which generates time-varying risk-aversion and consequently time-variation in risk-premia, is the key channel. These models are fitted to data using simulation estimators. Both models are found to fit the data equally well at conventional significance levels, and they can track quite closely a new measure of realized annual volatility. Further scrutiny using a rich array of diagnostics suggests that the long run risk model is preferred.
ER  -