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Claude Bergeron
''Recursive preferences, long-run risks, and stock valuation''
( 2019, Vol. 39 No.2 )
In this note, we develop a stock valuation model with recursive preferences and long-run risks. The model is based on the Epstein and Zin (1989, 1991) and Weil (1989) recursive utility framework. Our main result indicates that the intrinsic value of a stock is negatively related to (i) the long-run covariance between dividends and aggregate consumption, and (ii) the long-run covariance between dividends and market returns. This theoretical finding suggests that the sensitivity of dividends to market returns and aggregate consumption affects the long-run risk of a firm and its equity value.
Keywords: Recursive preferences, Asset pricing, Long-run risk, Stock valuation
Manuscript Received : Mar 20 2019 Manuscript Accepted : May 02 2019

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