Central bank research hub - Papers by Shu Wu
https://www.bis.org/cbhub/list/author/author_15263/index.rss
Research hub papers by author Shu WuenThe Equilibrium Term Structure of Equity and Interest Rates
https://www.kansascityfed.org/~/media/files/publicat/reswkpap/pdf/rwp16-11.pdf?la=en
Kansas City Fed Working Papers by Taeyoung Doh and Shu WuThe Equilibrium Term Structure of Equity and Interest Rates2016-11-30T00:00:00ZWe develop an equilibrium asset pricing model with Epstein-Zin recursive preferences that accounts for major stylized facts of the term structure of bond and equity risk premia. While the term structure of bond risk premia tends to be upward-sloping on average, the term structure of equity risk premia is known to be downward-sloping. {{p}} The equilibrium asset pricing model with long-run consumption risks has difficulty matching these stylized facts simultaneously. The standard calibration of these models follows Bansal and Yaron (2004), in which agents prefer the early resolution of uncertainty and have the inter-temporal elasticity of substitution greater than one; this calibration implies an upward-sloping term structure of equity risk premia and a downward-sloping term structure of real bond risk premia. Although the standard model can match a downward-sloping term structure of equity risk premia by amplifying the short-run risk of dividend growth, it does not fully reconcile with empirical evidence implying an upward-sloping average yield curve and a downward-sloping term structure of Sharpe ratios of dividend strips. We extend a standard model in two dimensions. First, we incorporate time-varying market prices of risks by allowing marginal utility of consumption to be nonlinearly dependent on risk factors. Second, we endogenously determine expected cash flows and expected inflation as potentially nonlinear functions of risk factors. With these extensions, our model can match the average slope of both bond and equity risk premia together with the term structure of Sharpe ratios of dividend strips. At the same time, the model generates the behavior of the aggregate stock market return in line with the data.The Equilibrium Term Structure of Equity and Interest RatesFull texthttps://www.kansascityfed.org/~/media/files/publicat/reswkpap/pdf/rwp16-11.pdf?la=enTaeyoung DohShu WuTaeyoung Doh and Shu Wu2016-11-30Federal Reserve Bank of Kansas City Research Working PapersE43G12Cash flow and risk premium dynamics in an equilibrium asset-pricing model with recursive preferences
https://www.kansascityfed.org/~/media/files/publicat/reswkpap/pdf/rwp15-12.pdf
Kansas City Fed Working Papers by Taeyoung Doh and Shu WuCash flow and risk premium dynamics in an equilibrium asset-pricing model with recursive preferences2015-10-01T00:00:00ZUnder linear approximations for asset prices and the assumption of independence between expected consumption growth and time-varying volatility, long-run risks models imply constant market prices of risks and often generate counterfactual results about asset return and cash ﬂow predictability. We develop and estimate a nonlinear equilibrium asset pricing model with recursive preferences and a ﬂexible econometric speciﬁcation of cash ﬂow processes. While in many long-run risks models time-varying volatility inﬂuences only risk premium but not expected cash ﬂows, in our model a common set of risk factors drive both expected cash ﬂow and risk premium dynamics. This feature helps the model to overcome two main criticisms against long-run risk models following Bansal and Yaron (2004): the over-predictability of cash ﬂows by asset prices and the tight relation between time-varying risk premia and growth volatility. Our model extends the approach in Le and Singleton (2010) to a setting with multiple cash ﬂows. We estimate the model using the long-run historical data in the U.S. and ﬁnd that the model with generalized market prices of risks produces cash ﬂow and return predictability that are more consistent with the data.Cash flow and risk premium dynamics in an equilibrium asset-pricing model with recursive preferencesFull texthttps://www.kansascityfed.org/~/media/files/publicat/reswkpap/pdf/rwp15-12.pdfTaeyoung DohShu WuTaeyoung Doh and Shu Wu2015-10-01Federal Reserve Bank of Kansas City Research Working PapersE21G12