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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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Bibliographic Info

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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Publication status: published as "An Empirical Evaluation of the Long-Run Risks Model for Asset Prices", (Dana Kiku and Amir Yaron) Critical Finance Review 2012: Vol. 1:No 1, pp 183-221.
Handle: RePEc:nbr:nberwo:15504

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Citations

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Cited by:
  1. 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.).
  2. Giovannetti, Bruno C., 2013. "Asset pricing under quantile utility maximization," Review of Financial Economics, Elsevier, vol. 22(4), pages 169-179.
  3. Andreas Fuster & Benjamin Hebert & David Laibson, 2011. "Natural Expectations, Macroeconomic Dynamics, and Asset Pricing," NBER Working Papers 17301, National Bureau of Economic Research, Inc.
  4. 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.
  5. 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.
  6. Li, Minqiang, 2010. "Asset Pricing - A Brief Review," MPRA Paper 22379, University Library of Munich, Germany.

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