In search of preference shock risks : evidence from longevity risks and momentum profits
Time-preference shocks affect agents’ preferences for assets with different durations. We consider longevity risk as a source of time-preference shocks and model it in the recursive preferences setting. This implies a consumption-based three-factor model, including longevity risk, consumption growth...
| Main Authors: | , |
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| Other Authors: | |
| Format: | Journal Article |
| Language: | English |
| Published: |
2021
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| Online Access: | https://hdl.handle.net/10356/151681 |
| _version_ | 1824453152676511744 |
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| author | Chen, Zhanhui Yang, Bowen |
| author2 | Nanyang Business School |
| author_facet | Nanyang Business School Chen, Zhanhui Yang, Bowen |
| author_sort | Chen, Zhanhui |
| collection | NTU |
| description | Time-preference shocks affect agents’ preferences for assets with different durations. We consider longevity risk as a source of time-preference shocks and model it in the recursive preferences setting. This implies a consumption-based three-factor model, including longevity risk, consumption growth rate, and the market portfolio, where longevity has a negative price of risk. Empirically, this model explains many well-known cross-sectional portfolios. Notably, we find that longevity risk and the momentum factor share a common business cycle component, i.e., short-run consumption risks. Prior winners (losers) provide hedging against mortality (longevity) risk and thus have higher (lower) expected returns, because winners have higher dividend growth and shorter equity durations than losers. Time-varying longevity risk captures most momentum profits over time, including the large momentum crashes observed in the data. |
| first_indexed | 2024-10-01T07:55:52Z |
| format | Journal Article |
| id | ntu-10356/151681 |
| institution | Nanyang Technological University |
| language | English |
| last_indexed | 2024-10-01T07:55:52Z |
| publishDate | 2021 |
| record_format | dspace |
| spelling | ntu-10356/1516812023-05-19T07:31:16Z In search of preference shock risks : evidence from longevity risks and momentum profits Chen, Zhanhui Yang, Bowen Nanyang Business School Division of Banking and Finance Business::Finance Time-preference Shocks Longevity Risk Time-preference shocks affect agents’ preferences for assets with different durations. We consider longevity risk as a source of time-preference shocks and model it in the recursive preferences setting. This implies a consumption-based three-factor model, including longevity risk, consumption growth rate, and the market portfolio, where longevity has a negative price of risk. Empirically, this model explains many well-known cross-sectional portfolios. Notably, we find that longevity risk and the momentum factor share a common business cycle component, i.e., short-run consumption risks. Prior winners (losers) provide hedging against mortality (longevity) risk and thus have higher (lower) expected returns, because winners have higher dividend growth and shorter equity durations than losers. Time-varying longevity risk captures most momentum profits over time, including the large momentum crashes observed in the data. Ministry of Education (MOE) Nanyang Technological University Zhanhui Chen acknowledges financial support from the Nanyang Technological University Start-Up Grant and Singapore Ministry of Education Academic Research Fund Tier 1 (RG67/13; RG151/16). 2021-07-01T09:20:44Z 2021-07-01T09:20:44Z 2019 Journal Article Chen, Z. & Yang, B. (2019). In search of preference shock risks : evidence from longevity risks and momentum profits. Journal of Financial Economics, 133(1), 225-249. https://dx.doi.org/10.1016/j.jfineco.2019.01.004 0304-405X https://hdl.handle.net/10356/151681 10.1016/j.jfineco.2019.01.004 2-s2.0-85060097342 1 133 225 249 en RG67/13 RG151/16 Journal of Financial Economics © 2019 Elsevier B.V. All rights reserved. |
| spellingShingle | Business::Finance Time-preference Shocks Longevity Risk Chen, Zhanhui Yang, Bowen In search of preference shock risks : evidence from longevity risks and momentum profits |
| title | In search of preference shock risks : evidence from longevity risks and momentum profits |
| title_full | In search of preference shock risks : evidence from longevity risks and momentum profits |
| title_fullStr | In search of preference shock risks : evidence from longevity risks and momentum profits |
| title_full_unstemmed | In search of preference shock risks : evidence from longevity risks and momentum profits |
| title_short | In search of preference shock risks : evidence from longevity risks and momentum profits |
| title_sort | in search of preference shock risks evidence from longevity risks and momentum profits |
| topic | Business::Finance Time-preference Shocks Longevity Risk |
| url | https://hdl.handle.net/10356/151681 |
| work_keys_str_mv | AT chenzhanhui insearchofpreferenceshockrisksevidencefromlongevityrisksandmomentumprofits AT yangbowen insearchofpreferenceshockrisksevidencefromlongevityrisksandmomentumprofits |