Advanced Search

Papers Articles Authors Institutions Data (FRED®)

Abstract

The long-run risks model of asset prices explains stock price variation as a response to persistent fluctuations in the mean and volatility of aggregate consumption growth, by a representative agent with a high elasticity of intertemporal substitution. This paper documents several empirical difficulties for the model as calibrated by Bansal and Yaron (BY, 2004) and Bansal, Kiku, and Yaron (BKY, 2007a). BY's calibration counterfactually implies that long-run consumption and dividend growth should be highly persistent and predictable from stock prices. BKY's calibration does better in this respect by greatly increasing the persistence of volatility fluctuations and their impact on stock prices. This calibration fits the predictive power of stock prices for future consumption volatility, but implies much greater predictive power of stock prices for future stock return volatility than is found in the data. Neither calibration can explain why movements in real interest rates do not generate strong predictable movements in consumption growth. Finally, the long-run risks model implies extremely low yields and negative term premia on inflation-indexed bonds.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.nber.org/papers/w14788.pdf
Download Restriction: no

Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14788.

as HTML HTML with abstract plain text plain text with abstract BibTeX RIS (EndNote, RefMan, ProCite) ReDIF in new window

Length:
Date of creation: Mar 2009
Date of revision:
Handle: RePEc:nbr:nberwo:14788

Note: AP
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

Find related papers by JEL classification:

• E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
• G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

This paper has been announced in the following NEP Reports:

• NEP-ALL-2009-03-14 (All new papers)
• NEP-BEC-2009-03-14 (Business Economics)
• NEP-DGE-2009-03-14 (Dynamic General Equilibrium)
• NEP-MAC-2009-03-14 (Macroeconomics)

References

References listed on IDEAS
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.:

as HTML HTML with abstract plain text plain text with abstract BibTeX RIS (EndNote, RefMan, ProCite) ReDIF in new window

1. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
   
   • Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
2. Lettau, Martin & Ludvigson, Sydney & Wachter, Jessica, 2006. "The Declining Equity Premium: What Role Does Macroeconomic Risk Play?," CEPR Discussion Papers 5519, C.E.P.R. Discussion Papers.
   
   • Martin Lettau & Sydney Ludvigson & Jessica Wachter, 2005. "The declining equity premium: what role does macroeconomic risk play?," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
   • Martin Lettau & Sydney C. Ludvigson & Jessica A. Wachter, 2008. "The Declining Equity Premium: What Role Does Macroeconomic Risk Play?," Review of Financial Studies, Society for Financial Studies, vol. 21(4), pages 1653-1687, July.
   • Martin Lettau & Sydney C. Ludvigson, 2004. "The Declining Equity Premium: What Role Does Macroeconomic Risk Play?," 2004 Meeting Papers 644, Society for Economic Dynamics.
   • Martin Lettau & Sydney C. Ludvigson & Jessica A. Wachter, 2004. "The Declining Equity Premium: What Role Does Macroeconomic Risk Play?," NBER Working Papers 10270, National Bureau of Economic Research, Inc.
3. John Y. Campbell, 1987. "Bond and Stock Returns in a Simple Exchange Model," NBER Working Papers 1509, National Bureau of Economic Research, Inc.
   
   • Campbell, John Y, 1986. "Bond and Stock Returns in a Simple Exchange Model," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 785-803, November.
   • Campbell, John, 1986. "Bond and Stock Returns in a Simple Exchange Model," Scholarly Articles 3122544, Harvard University Department of Economics.
4. John Y. Campbell, 1993. "Understanding Risk and Return," NBER Working Papers 4554, National Bureau of Economic Research, Inc.
   
   • Campbell, John Y, 1996. "Understanding Risk and Return," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 298-345, April.
   • John Y. Campbell, 1995. "Understanding Risk and Return," Harvard Institute of Economic Research Working Papers 1711, Harvard - Institute of Economic Research.
   • Campbell, John, 1996. "Understanding Risk and Return," Scholarly Articles 3153293, Harvard University Department of Economics.
5. Hodrick, Robert J, 1992. "Dividend Yields and Expected Stock Returns: Alternative Procedures for Inference and Measurement," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 357-86.
   
   • Tom Doan, . "OLSHODRICK: RATS procedure to compute Hodrick standard errors," Statistical Software Components RTS00147, Boston College Department of Economics.
6. Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 249-65, April.
7. Lettau, Martin & Ludvigson, Sydney, 1999. "Consumption, Aggregate Wealth and Expected Stock Returns," CEPR Discussion Papers 2223, C.E.P.R. Discussion Papers.
   
   • Martin Lettau, 2001. "Consumption, Aggregate Wealth, and Expected Stock Returns," Journal of Finance, American Finance Association, vol. 56(3), pages 815-849, 06.
   • Sydney Ludvigson & Martin Lettau, 1999. "Consumption, aggregate wealth and expected stock returns," Staff Reports 77, Federal Reserve Bank of New York.
8. Weil, Philippe, 1989. "The equity premium puzzle and the risk-free rate puzzle," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 401-421, November.
   
   • Phillippe Weil, 1997. "The Equity Premium Puzzle and the Risk-Free Rate Puzzle," Levine's Working Paper Archive 1833, David K. Levine.
   • Philippe Weil, 1989. "The Equity Premium Puzzle and the Riskfree Rate Puzzle," NBER Working Papers 2829, National Bureau of Economic Research, Inc.
9. Barro, Robert, 2006. "Rare Disasters and Asset Markets in the Twentieth Century," Scholarly Articles 3208215, Harvard University Department of Economics.
10. Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, vol. 57(4), pages 937-69, July.
11. John Y. Campbell, 1991. "A Variance Decomposition for Stock Returns," NBER Working Papers 3246, National Bureau of Economic Research, Inc.
    
    • Campbell, John Y, 1991. "A Variance Decomposition for Stock Returns," Economic Journal, Royal Economic Society, vol. 101(405), pages 157-79, March.
    • Campbell, John, 1991. "A Variance Decomposition for Stock Returns," Scholarly Articles 3207695, Harvard University Department of Economics.
12. Ravi Bansal & Varoujan Khatachtrian & Amir Yaron, 2002. "Interpretable Asset Markets?," NBER Working Papers 9383, National Bureau of Economic Research, Inc.
    
    • Bansal, Ravi & Khatchatrian, Varoujan & Yaron, Amir, 2005. "Interpretable asset markets?," European Economic Review, Elsevier, vol. 49(3), pages 531-560, April.
    • Ravi Bansal & Varoujan Khatchatrian & Amir Yaron, 2004. "Interpretable Asset Markets?," 2004 Meeting Papers 136b, Society for Economic Dynamics.
13. Ravi Bansal & Robert Dittmar & Dana Kiku, 2007. "Cointegration and Consumption Risks in Asset Returns," NBER Working Papers 13108, National Bureau of Economic Research, Inc.
    
    • Ravi Bansal & Robert Dittmar & Dana Kiku, 2009. "Cointegration and Consumption Risks in Asset Returns," Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 1343-1375, March.
14. 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.
    
    • Lars Peter Hansen & John Heaton & Nan Li, 2005. "Consumption Strikes Back?: Measuring Long-Run Risk," NBER Working Papers 11476, National Bureau of Economic Research, Inc.
15. Campbell, John, 1993. "Intertemporal Asset Pricing Without Consumption Data," Scholarly Articles 3221491, Harvard University Department of Economics.
    
    • Campbell, John Y, 1993. "Intertemporal Asset Pricing without Consumption Data," American Economic Review, American Economic Association, vol. 83(3), pages 487-512, June.
    • John Y. Campbell, 1992. "Intertemporal Asset Pricing Without Consumption Data," NBER Working Papers 3989, National Bureau of Economic Research, Inc.
16. Restoy, Fernando & Weil, Philippe, 2011. "Approximate Equilibrium Asset Prices," Open Access publications from Sciences Po info:hdl:2441/5l6uh8ogmqi, Sciences Po.
    
    • Fernando Restoy & Philippe Weil, 2011. "Approximate Equilibrium Asset Prices," Review of Finance, European Finance Association, vol. 15(1), pages 1-28.
    • Fernando Restoy & Philippe Weil, 1995. "Approximate Equilibrium Asset Prices," Banco de España Working Papers 9515, Banco de España.
    • Fernando Restoy & Philippe Weil, 1998. "Approximate Equilibrium Asset Prices," NBER Working Papers 6611, National Bureau of Economic Research, Inc.
17. Martin L. Weitzman, 2007. "Subjective Expectations and Asset-Return Puzzles," American Economic Review, American Economic Association, vol. 97(4), pages 1102-1130, September.
18. Monika Piazzesi & Martin Schneider, 2006. "Equilibrium Yield Curves," NBER Working Papers 12609, National Bureau of Economic Research, Inc.
    
    • Monika Piazzesi & Martin Schneider, 2007. "Equilibrium Yield Curves," NBER Chapters, in: NBER Macroeconomics Annual 2006, Volume 21, pages 389-472 National Bureau of Economic Research, Inc.
19. Douglas Staiger & James H. Stock, 1997. "Instrumental Variables Regression with Weak Instruments," Econometrica, Econometric Society, vol. 65(3), pages 557-586, May.
    
    • Douglas Staiger & James H. Stock, 1994. "Instrumental Variables Regression with Weak Instruments," NBER Technical Working Papers 0151, National Bureau of Economic Research, Inc.
20. John Y. Campbell & N. Gregory Mankiw, 1990. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Working Papers 2924, National Bureau of Economic Research, Inc.
    
    • John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income and Interest Rates: Reinterpreting the Time Series Evidence," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 185-246 National Bureau of Economic Research, Inc.
21. Beaudry, Paul & van Wincoop, Eric, 1996. "The Intertemporal Elasticity of Substitution: An Exploration Using a US Panel of State Data," Economica, London School of Economics and Political Science, vol. 63(251), pages 495-512, August.
22. Robert E. Hall, 1988. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
    
    • Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-57, April.
23. repec:fth:harver:1435 is not listed on IDEAS
24. Laurent E. Calvet & Adlai J. Fisher, 2005. "Multifrequency News and Stock Returns," NBER Working Papers 11441, National Bureau of Economic Research, Inc.
    
    • Calvet, Laurent E. & Fisher, Adlai J., 2007. "Multifrequency news and stock returns," Journal of Financial Economics, Elsevier, vol. 86(1), pages 178-212, October.
25. Ian Martin, 2010. "The Valuation of Long-Dated Assets," NBER Working Papers 16219, National Bureau of Economic Research, Inc.
26. Wheatley, Simon, 1988. "Some tests of the consumption-based asset pricing model," Journal of Monetary Economics, Elsevier, vol. 22(2), pages 193-215, September.
27. Attanasio, Orazio P & Weber, Guglielmo, 1993. "Consumption Growth, the Interest Rate and Aggregation," Review of Economic Studies, Wiley Blackwell, vol. 60(3), pages 631-49, July.
28. Fama, Eugene F. & French, Kenneth R., 1988. "Dividend yields and expected stock returns," Journal of Financial Economics, Elsevier, vol. 22(1), pages 3-25, October.
29. Cavanagh, Christopher L. & Elliott, Graham & Stock, James H., 1995. "Inference in Models with Nearly Integrated Regressors," Econometric Theory, Cambridge University Press, vol. 11(05), pages 1131-1147, October.
30. Robert F. Stambaugh, 1999. "Predictive Regressions," NBER Technical Working Papers 0240, National Bureau of Economic Research, Inc.
    
    • Stambaugh, Robert F., 1999. "Predictive regressions," Journal of Financial Economics, Elsevier, vol. 54(3), pages 375-421, December.
31. Jonathan A. Parker & Christian Julliard, 2003. "Consumption Risk and Cross-Sectional Returns," NBER Working Papers 9538, National Bureau of Economic Research, Inc.
32. Ian Martin, 2010. "Consumption-Based Asset Pricing with Higher Cumulants," NBER Working Papers 16153, National Bureau of Economic Research, Inc.

Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

as HTML HTML with abstract plain text plain text with abstract BibTeX RIS (EndNote, RefMan, ProCite) ReDIF in new window

Cited by:

1. Andreas Fuster & Benjamin Hebert & David Laibson, 2011. "Natural Expectations, Macroeconomic Dynamics, and Asset Pricing," NBER Working Papers 17301, National Bureau of Economic Research, Inc.
   
   • Andreas Fuster & Benjamin Hebert & David Laibson, 2011. "Natural Expectations, Macroeconomic Dynamics, and Asset Pricing," NBER Chapters, in: NBER Macroeconomics Annual 2011, Volume 26, pages 1-48 National Bureau of Economic Research, Inc.
2. Nengjiu Ju & Jianjun Miao, . "Ambiguity, Learning, and Asset Returns," Boston University - Department of Economics - Working Papers Series wp2009-014, Boston University - Department of Economics.
   
   • Nengjiu Ju & Jianjun Miao, 2012. "Ambiguity, Learning, and Asset Returns," Econometrica, Econometric Society, vol. 80(2), pages 559-591, 03.
   • Ju, Nengjiu & Miao, Jianjun, 2009. "Ambiguity, Learning, and Asset Returns," MPRA Paper 14737, University Library of Munich, Germany, revised Apr 2009.
   • Jianjun Miao & NENGJIU JU, 2010. "Ambiguity, Learning, And Asset Returns," Boston University - Department of Economics - Working Papers Series WP2010-031, Boston University - Department of Economics.
   • Nengjiu Ju & Jianjun Miao, 2010. "Ambiguity, Learning, and Asset Returns," CEMA Working Papers 438, China Economics and Management Academy, Central University of Finance and Economics.
3. Na Guo & Peter N. Smith, 2012. "Durable Consumption, Long-Run Risk and The Equity Premium," Discussion Papers 12/37, Department of Economics, University of York.
4. Li, Minqiang, 2010. "Asset Pricing - A Brief Review," MPRA Paper 22379, University Library of Munich, Germany.
5. Backus, David & Chernov, Mikhail & Zin, Stanley E., 2011. "Sources of entropy in representative agent models," CEPR Discussion Papers 8488, C.E.P.R. Discussion Papers.
   
   • David Backus & Mikhail Chernov & Stanley E. Zin, 2011. "Sources of Entropy in Representative Agent Models," NBER Working Papers 17219, National Bureau of Economic Research, Inc.
   • David Backus & Mikhail Chernov & Stanley Zin, 2011. "Sources of Entropy in Representative Agent Models," Working Papers 11-21, New York University, Leonard N. Stern School of Business, Department of Economics.
6. Ravi Jagannathan & Srikant Marakani, 2011. "Long Run Risks & Price/Dividend Ratio Factors," NBER Working Papers 17484, National Bureau of Economic Research, Inc.
7. Bakshi, Gurdip & Chabi-Yo, Fousseni, 2011. "Variance Bounds on the Permanent and Transitory Components of Stochastic Discount Factors," Working Paper Series 2011-11, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
8. Ravi Bansal & Dana Kiku & Amir Yaron, 2009. "An Empirical Evaluation of the Long-Run Risks Model for Asset Prices," NBER Working Papers 15504, National Bureau of Economic Research, Inc.
9. Benzoni, Luca & Collin-Dufresne, Pierre & Goldstein, Robert S., 2011. "Explaining asset pricing puzzles associated with the 1987 market crash," Journal of Financial Economics, Elsevier, vol. 101(3), pages 552-573, September.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:14788

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

---

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.

Privacy Legal