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Title: In search of preference shock risks : evidence from longevity risks and momentum profits
Authors: Chen, Zhanhui
Yang, Bowen
Keywords: Business::Finance
Issue Date: 2019
Source: 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.
Project: RG67/13
Journal: Journal of Financial Economics
Abstract: 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.
ISSN: 0304-405X
DOI: 10.1016/j.jfineco.2019.01.004
Rights: © 2019 Elsevier B.V. All rights reserved.
Fulltext Permission: none
Fulltext Availability: No Fulltext
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