Working Paper: NBER ID: w9383
Authors: Ravi Bansal; Varoujan Khatchatrian; Amir Yaron
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.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| consumption volatility (E20) | asset valuation ratios (G32) |
| asset valuation ratios (G32) | economic uncertainty (D89) |
| expected growth (O40) | asset valuations (G32) |
| current price-earnings ratios (G19) | future earnings growth rates (O49) |
| economic uncertainty (D89) | expected returns (G17) |