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Global Asset Pricing: Is There a Role for Long-run Consumption Risk?

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Author Info

  • Jesper Rangvid

    ()
    (Copenhagen Business School)

  • Maik Schmeling

    ()
    (Department of Economics, Leibniz University Hannover)

  • Andreas Schrimpf

    ()
    (School of Economics and Management and CREATES)

Abstract

We estimate long-run consumption-based asset pricing models using a comprehensive set of international test assets, including broad equity market portfolios, international value/growth portfolios, and international bond portfolios. We find that differences in returns across assets within a country are sometimes (and most prominently for the U.S.) better captured by the assets' exposure to long-run consumption risk as opposed to their exposure to one-period changes in consumption (the canonical consumption CAPM). Across countries, however, exposure to long-run consumption risk does not provide a better fit than the canonical consumption CAPM. Thus, when characterizing the cross-country distribution of returns, long-run consumption risk does not seem to play any particular role, even if long-run risk is important for explaining the cross section of expected returns in the U.S. Furthermore, we show that consumption growth is more predictable over short to medium-run horizons than over longer horizons and that empirical evidence of a de- clining risk aversion parameter estimate in long-run risk models has to be interpreted with care.

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Bibliographic Info

Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2009-57.

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Length: 38
Date of creation: 01 Nov 2009
Date of revision:
Handle: RePEc:aah:create:2009-57

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Web page: http://www.econ.au.dk/afn/

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Keywords: International Asset Pricing; Long-run Consumption Risk;

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References

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  1. Driessen, J.J.A.G. & Melenberg, B. & Nijman, T.E., 2003. "Common factors in international bond returns," Open Access publications from Tilburg University urn:nbn:nl:ui:12-123825, Tilburg University.
  2. Hanno N. Lustig & Stijn G. Van Nieuwerburgh, 2005. "Housing Collateral, Consumption Insurance, and Risk Premia: An Empirical Perspective," Journal of Finance, American Finance Association, vol. 60(3), pages 1167-1219, 06.
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  12. Li, Yuming & Zhong, Maosen, 2005. "Consumption habit and international stock returns," Journal of Banking & Finance, Elsevier, vol. 29(3), pages 579-601, March.
  13. Lars Peter Hansen & John C. Heaton & Nan Li, 2008. "Consumption Strikes Back? Measuring Long-Run Risk," Journal of Political Economy, University of Chicago Press, vol. 116(2), pages 260-302, 04.
  14. Koijen, Ralph & Lustig, Hanno & van Nieuwerburgh, Stijn, 2012. "The Cross-Section and Time-Series of Stock and Bond Returns," CEPR Discussion Papers 9024, C.E.P.R. Discussion Papers.
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Cited by:
  1. Stefano D'Addona & Frode Brevik, 2011. "Rational Ignorance In Long-Run Risk Models," Working Papers 0811, CREI Università degli Studi Roma Tre, revised 2011.

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