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| Publications of Dana Kiku :chronological combined listing:%% Working Papers @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{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{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} } | |
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