Skip Navigation



Review of Finance Advance Access published online on July 14, 2009
Review of Finance, doi:10.1093/rof/rfp015
This Article
Right arrow Full Text
Right arrow Full Text (PDF)
Right arrow Alert me when this article is cited
Right arrow Alert me if a correction is posted
Services
Right arrow Email this article to a friend
Right arrow Similar articles in this journal
Right arrow Alert me to new issues of the journal
Right arrow Add to My Personal Archive
Right arrow Download to citation manager
Right arrowRequest Permissions
Google Scholar
Right arrow Articles by Wang, Z.
Right arrow Articles by Bidarkota, P. V.
Social Bookmarking
Add to CiteULike   Add to Connotea   Add to Del.icio.us  
What's this?

The Authors 2009. Published by Oxford University Press on behalf of the European Finance Association. All right reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

A Long-Run Risks Model of Asset Pricing with Fat Tails*

Zhiguang (Gerald) Wang and Prasad V. Bidarkota

Department of Economics, Florida International University

We explore the effects of fat tails on the equilibrium implications of the long-run risks model of asset pricing by introducing innovations with dampened power law to consumption and dividends growth processes. We estimate the model structural parameters by maximum likelihood. We find that the stochastic volatility model with fat tails can generate implied risk premium, expected risk free rate and their volatilities comparable to the magnitudes observed in data. The model with fat tails leads to a significant increase in implied risk premia over the benchmark Gaussian model, but similar values for other equilibrium quantities of interest.

JEL Classification: E43, G12, G13

* We thank an anonymous referee, Bernard Dumas (the editor) and participants at the 2008 FMA Doctoral Student Consortium, 2009 MFA Annual Conference, seminar participants at Florida International University, the University of Macau, South Dakota State University for their valuable comments. Zhiguang (Gerald) Wang is especially grateful to Dr. Albert "Pete" Kyle for his insightful comments. He also acknowledges Dissertation Year Fellowship from Florida International University. All errors remain our own.


Add to CiteULike CiteULike   Add to Connotea Connotea   Add to Del.icio.us Del.icio.us    What's this?




Disclaimer: Please note that abstracts for content published before 1996 were created through digital scanning and may therefore not exactly replicate the text of the original print issues. All efforts have been made to ensure accuracy, but the Publisher will not be held responsible for any remaining inaccuracies. If you require any further clarification, please contact our Customer Services Department.