In search of preference shock risks: Evidence from longevity risks and momentum profits

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Authors: Zhanhui Chen and Bowen Yang
Date: July 2019
From: Journal of Financial Economics(Vol. 133, Issue 1)
Publisher: Elsevier B.V.
Document Type: Report
Length: 296 words

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Keywords Time-preference shocks; Longevity risk; Momentum profits; Equity durations; Consumption-based models 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. Author Affiliation: Division of Banking & Finance, Nanyang Business School, Nanyang Technological University, 50 Nanyang Avenue S3-B1B-72, 639798, Singapore * Corresponding author. Tel.: +65-6790-6133; fax: +65-6791-3236. Article History: Received 9 October 2016; Revised 24 October 2017; Accepted 20 November 2017 (footnote)[white star] We are grateful for helpful comments from Zhi Da, Robert Dittmar (the referee), Michael Gallmeyer, Pengjie Gao, Nicolae Garleanu, Burton Hollifield, Spencer Martin, Ronald Masulis, Lin Peng, Steven Ongena, Ralitsa Petkova, Matthew Spiegel, Sheridan Titman, Neng Wang, Jianfeng Yu, Xiaoyan Zhang, Irina Zviadadze, and the seminar participants at 2017 Asian Meeting of the Econometric Society, 2017 Annual Meeting of the European Finance Association, Deakin University, Monash University, National Chengchi University, Nanyang Technological University, Tsinghua University, University of New South Wales, and University of Sydney. 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). Byline: Zhanhui Chen [] (*), Bowen Yang []

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Gale Document Number: GALE|A586465113