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

Listed author(s):
  • Bansal, Ravi
  • Kiku, Dana
  • Yaron, Amir
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    We provide an empirical evaluation of the Long-Run Risks (LRR) model, and highlight important differences in the asset pricing implications of the LRR model relative to the habit model. We feature three key results: (i) consistent with the LRR model there is considerable evidence in the data for time-varying expected consumption growth and consumption volatility, (ii) the LRR model matches the key asset markets data features, (iii) in the data and in the LRR model accordingly, lagged consumption growth does not predict the future price-dividend ratio, while in the habit-model it counterfactually predicts the future price-dividend with an R 2 of over 40%. Overall, we find considerable empirical support for the LRR model.

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    Article provided by now publishers in its journal Critical Finance Review.

    Volume (Year): 1 (2012)
    Issue (Month): 1 (January)
    Pages: 183-221

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    Handle: RePEc:now:jnlcfr:104.00000005
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