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Can inflation and monetary policy predict asset prices?
Carina Fleischer
University of Luxembourg, Luxembourg
Discussant: Nicole Branger (University of Muenster)
We develop a continuous-time endowment economy model of the US with inflation and the central bank’s interest rate adjustments as observable risk factors. We show that they have predictive power for consumption growth and can explain many features of the aggregate stock and bond market. We derive the price-dividend ratio, the equity premium, the risk-free rate, and the term structure of interest rates. We show in a calibrated model that inflation and the federal funds rate adequately predict those key asset pricing moments. The model offers a novel mechanism to explain the variation in the aggregate price-dividend ratio and the risk-free rate as it relies on observable rather than latent risk factors.
12:00pm - 12:30pm
Portfolio Selection and Asset Pricing with Ambiguity: a two-stage Evaluation Approach
Ying He1, Julian Hölzermann1,2
1University of Southern Denmark, Denmark; 2Danish Finance Institute
Discussant: Carina Fleischer (University of Luxembourg)
This paper applies a two-stage evaluation procedure to study investors’ portfolio selection and asset pricing consequences in the presence of risk and ambiguity. The two-stage evaluation procedure represents investors’ attitudes towards risk and ambiguity. Investors optimally hold a combination of three funds: a risk-free, a solely risky, and a risky and ambiguous fund. In equilibrium, the risk premia on all assets are determined by their exposure to systemic risk and ambiguity. The results are straightforward to implement and test and well-suited for many types of applications. The results theoretically explain the asset allocation puzzle and the size effect.
12:30pm - 1:00pm
Intermediary asset pricing with heterogeneous intermediaries in a production economy
Nicole Branger1, Patrick Brock2, Christian Schlag2, Leonie Wieneke1
1University of Muenster, Germany; 2Goethe University Frankfurt, Germany
Discussant: Julian Hölzermann (University of Southern Denmark)
We analyze an intermediary asset pricing model with three heterogeneous agents — funds, banks, and households — in a continuous-time production economy. Agents differ in risk aversion and capital productivity; financial intermediaries face a Value-at-Risk constraint. We show that the constraint significantly dampens investment, asset prices, and consumption growth. Recursive preferences amplify these effects, while log utility substantially underestimates them. Our results highlight the macroeconomic consequences of financial regulation and investor heterogeneity, offering insights for both policy design and the asset pricing literature.
