Risks For the Long Run: Estimation with Time Aggregation
AbstractThe long-run risks (LRR) asset pricing model emphasizes the role of low-frequency movements in expected growth and economic uncertainty, along with investor preferences for early resolution of uncertainty, as an important economic-channel that determines asset prices. In this paper, we estimate the LRR model. To accomplish this we develop a method that allows us to estimate models with recursive preferences, latent state variables, and time-aggregated data. Time-aggregation makes the decision interval of the agent an important parameter to estimate. We find that time-aggregation can significantly affect parameter estimates and statistical inference. Imposing the pricing restrictions and explicitly accounting for time-aggregation, we show that the estimated LRR model can account for the joint dynamics of aggregate consumption, asset cash flows and prices, including the equity premia, risk-free rate and volatility puzzles.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18305.
Date of creation: Aug 2012
Date of revision:
Note: AP EFG ME
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Find related papers by JEL classification:
- E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment
- G1 - Financial Economics - - General Financial Markets
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-08-23 (All new papers)
- NEP-MAC-2012-08-23 (Macroeconomics)
- NEP-UPT-2012-08-23 (Utility Models & Prospect Theory)
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