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Asset Pricing Tests with Long Run Risks in Consumption Growth

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Author Info
George M. Constantinides
Anisha Ghosh
Abstract

The Bansal and Yaron (2004) model of long-run risks (LRR) in aggregate consumption and dividend growth and its cointegrated extension are tested on a cross-section of assets and rejected over 1930-2006. Reversal of earlier conclusions is due to the increased power of the tests resulting from two observations under the null: the latent state variables and, therefore, the pricing kernel are known affine functions of observables; and, the unconditional moments of the time series processes impose constraints in addition to the pricing constraints. The models perform better in postwar subperiods, consistent with evidence of structural-breaks.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14543.

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Date of creation: Dec 2008
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Handle: RePEc:nbr:nberwo:14543

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G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Anisha Ghosh & Oliver Linton, 2009. "Consistent estimation of the risk-return tradeoff in the presence of measurement error," Economics Working Papers we094928, Universidad Carlos III, Departamento de Economía. [Downloadable!]
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