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Latent Utility Shocks in a Structural Empirical Asset Pricing Model

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Author Info
Christensen, Bent Jesper (Department of Finance, Copenhagen Business School)
Raahauge, Peter (Department of Finance, Copenhagen Business School)

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Abstract

We consider a random utility extension of the fundamental Lucas (1978) equilibrium asset pricing model. The resulting structural model leads naturally to a likelihood function. We estimate the model using U.S. asset market data from 1871 to 2000, using both dividends and earnings as state variables. We find that current dividends do not forecast future utility shocks, whereas current utility shocks do forecast future dividends. The estimated structural model produces a sequence of predicted utility shocks which provide better forecasts of future long-horizon stock market returns than the classical dividend-price ratio.

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File URL: http://openarchive.cbs.dk/cbsweb/handle/10398/7135
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Publisher Info
Paper provided by Copenhagen Business School, Department of Finance in its series Working Papers with number 2004-7.

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Length: 36 pages
Date of creation: 14 Dec 2004
Date of revision:
Handle: RePEc:hhs:cbsfin:2004_007

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Postal: Department of Finance, Copenhagen Business School, Solbjerg Plads 3, A5, DK-2000 Frederiksberg, Denmark
Phone: +45 3815 3815
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Web page: http://www.cbs.dk/departments/finance/
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Related research
Keywords: Randomutility; asset pricing; maximumlikelihood; structuralmodel; return predictability;

Find related papers by JEL classification:
G00 - Financial Economics - - General - - - General

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