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

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  • Ravi Bansal
  • Dana Kiku
  • Amir Yaron

Abstract

We provide an empirical evaluation of the forward-looking long-run risks (LRR) model and highlight model differences with the backward-looking habit based asset pricing model. We feature three key results: (i) Consistent with the LRR model, there is considerable evidence in the data of time-varying expected consumption growth and volatility, (ii) The LRR model matches the key asset markets data features, (iii) In the data and in the LRR model accordingly, past consumption growth does not predict future asset prices, whereas lagged consumption in the habit model forecasts future price-dividend ratios with an R2 of over 40%. Overall, our evidence implies that the LRR model provides a coherent framework to analyze and interpret asset prices.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15504.

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Date of creation: Nov 2009
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Handle: RePEc:nbr:nberwo:15504

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Cited by:
  1. Ravi Bansal & Dana Kiku & Amir Yaron, 2010. "Long Run Risks, the Macroeconomy, and Asset Prices," American Economic Review, American Economic Association, vol. 100(2), pages 542-46, May.
  2. 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.
  3. Turan G. Bali & Hao Zhou, 2011. "Risk, uncertainty, and expected returns," Finance and Economics Discussion Series 2011-45, Board of Governors of the Federal Reserve System (U.S.).
  4. Andreas Fuster & Benjamin Hebert & David Laibson, 2011. "Natural Expectations, Macroeconomic Dynamics, and Asset Pricing," NBER Working Papers 17301, National Bureau of Economic Research, Inc.
  5. Li, Minqiang, 2010. "Asset Pricing - A Brief Review," MPRA Paper 22379, University Library of Munich, Germany.
  6. Giovannetti, Bruno C., 2013. "Asset pricing under quantile utility maximization," Review of Financial Economics, Elsevier, vol. 22(4), pages 169-179.

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