Publications of Dana Kiku
%% Working Papers
@article{fds48049,
Author = {D. Kiku and Ravi Bansal},
Title = {Long-Run Asset Allocation},
Year = {2006},
Month = {June},
Abstract = {<div style="text-align: justify;"> In this paper we show
that the economic restriction of cointegration between
portfolio cash flow levels and consumption level has
important implications for return dynamics and portfolio
choice. When cash flows and consumption are cointegrated,
the cointegration error forecasts long-horizon dividend
growth rates and returns, and alters the variance-covariance
of returns by horizon. We show that the optimal asset mix,
based on the EC-VAR specification with the cointegration
restriction imposed, can be quite different relative to a
traditional VAR that ignores the cointegration restriction.
We develop and implement methods to account for parameter
uncertainty in the EC-VAR setup and highlight the importance
of the error-correction channel for optimal asset allocation
at short and long investment horizons. </div>},
Key = {fds48049}
}
@article{fds42548,
Author = {D. Kiku and Ravi Bansal and Robert Dittmar},
Title = {Cointegration and Consumption Risks in Asset
Returns},
Year = {2006},
Month = {March},
Abstract = {<div style="text-align: justify;"> In this paper, we argue
that long run movement in consumption is a key determinant
of the risk-return relation in asset markets. Our goal is to
explain cross-sectional differences in risk premia by
horizon. We show that as the investment horizon increases,
the return's consumption beta is dominated by the long-run
(cointegrating) relation between dividends and consumption.
Further, as cointegration alters dividend growth and return
predictability, it has important conceptual and empirical
implications for the risk-return tradeoff at all investment
horizons. We show that asset betas, derived from an
Error-Correction VAR model of returns, can successfully
account for the cross-sectional variation in equity mean
returns at both short and long horizons; this is not the
case when the cointegrating restriction is ignored. In all,
our evidence underscores the economic importance of
cointegration and risks related to long run movements in
consumption for understanding the whole term structure of
the risk-return tradeoff in the cross-section of assets.
</div>},
Key = {fds42548}
}
@article{fds42547,
Title = {Is the Value Premium a Puzzle?},
Year = {2005},
Month = {Fall},
Abstract = {<div style="text-align: justify;"> This paper provides an
economic explanation of the value premium puzzle,
differences in price/dividend and Sharpe ratios of value and
growth assets, volatilities of ex-post returns on the two
stocks and their correlation. I consider a model that
features two equally important ingredients: a small
persistent component in cash-flow growth dynamics and the
Epstein-Zin recursive utility preferences. In the model, as
in the data, cash flows of value firms are highly exposed to
low-frequency fluctuations in aggregate consumption, whereas
growth firms' dividends are mainly driven by short-lived
consumption news and risks related to fluctuating economic
uncertainty. I show that the dispersion in long-run risks is
the key mechanism that allows the model to quantitatively
replicate the magnitude of the historical value premium,
resolving the puzzle. Furthermore, heterogeneity in
systematic risks across firms helps account for the whole
transitional dynamics of value and growth returns, as well
as the empirical failure of the CAPM and C-CAPM. In
addition, the model is able to successfully accommodate the
time-series behavior of the aggregate equity market.
</div>},
Key = {fds42547}
}
@article{fds42549,
Title = {Trend/Cycle Risks: Decomposition and Premia},
Year = {2003},
Abstract = {<div style="text-align: justify;"> This paper studies the
relative importance of long- and short-run risks in assets'
cash flows in explaining the cross-sectional variation in
risk premia. Permanent and transitory economic shocks are
identified using two different methodologies developed in
Engle and Vahid (1993), and Gonzalo and Granger (1995). I
find that the cost of long-run economic uncertainty far
exceeds that for business-cycle fluctuations. Even though,
short-run cash-flow betas contain valuable information about
the risk-return tradeoff. </div>},
Key = {fds42549}
}