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An Empirical Evaluation of the Long-Run Risks Model for Asset Prices

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  • Bansal, Ravi
  • Kiku, Dana
  • Yaron, Amir
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    Abstract

    We provide an empirical evaluation of the Long-Run Risks (LRR) model, and highlight important differences in the asset pricing implications of the LRR model relative to the habit model. We feature three key results: (i) consistent with the LRR model there is considerable evidence in the data for time-varying expected consumption growth and consumption volatility, (ii) the LRR model matches the key asset markets data features, (iii) in the data and in the LRR model accordingly, lagged consumption growth does not predict the future price-dividend ratio, while in the habit-model it counterfactually predicts the future price-dividend with an R 2 of over 40%. Overall, we find considerable empirical support for the LRR model.

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    File URL: http://dx.doi.org/10.1561/104.00000005
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    Bibliographic Info

    Article provided by now publishers in its journal Critical Finance Review.

    Volume (Year): 1 (2012)
    Issue (Month): 1 (January)
    Pages: 183-221

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    Handle: RePEc:now:jnlcfr:104.00000005

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    Web page: http://www.nowpublishers.com/

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    Cited by:
    1. Jerry Tsai & Jessica A. Wachter, 2014. "Rare Booms and Disasters in a Multi-sector Endowment Economy," NBER Working Papers 20062, National Bureau of Economic Research, Inc.
    2. Marcelo Ochoa, 2013. "Volatility, labor heterogeneity and asset prices," Finance and Economics Discussion Series 2013-71, Board of Governors of the Federal Reserve System (U.S.).
    3. Robin Greenwood & Andrei Shleifer, . "Expectations of Returns and Expected Returns," Working Paper 102501, Harvard University OpenScholar.
    4. Fung, Ka Wai Terence & Lau, Chi Keung Marco & Chan, Kwok Ho, 2014. "The conditional equity premium, cross-sectional returns and stochastic volatility," Economic Modelling, Elsevier, vol. 38(C), pages 316-327.
    5. Bidder, Rhys & Dew-Becker, Ian, 2014. "Long-run risk is the worst-case scenario: ambiguity aversion and non-parametric estimation of the endowment process," Working Paper Series 2014-16, Federal Reserve Bank of San Francisco.
    6. John Y. Campbell & Stefano Giglio & Christopher Polk & Robert Turley, 2012. "An Intertemporal CAPM with Stochastic Volatility," NBER Working Papers 18411, National Bureau of Economic Research, Inc.
    7. Daniel Andrei & Bruce Carlin & Michael Hasler, 2014. "Model Disagreement and Economic Outlook," NBER Working Papers 20190, National Bureau of Economic Research, Inc.
    8. John Y. Campbell, 2013. "Comment on "Shocks and Crashes"," NBER Chapters, in: NBER Macroeconomics Annual 2013, Volume 28, pages 355-366 National Bureau of Economic Research, Inc.
    9. Jerry Tsai, 2013. "Rare Disasters and the Term Structure of Interest Rates," Economics Series Working Papers 665, University of Oxford, Department of Economics.

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