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Long-Run Risk and the Persistence of Consumption Shocks


  • Fulvio Ortu
  • Andrea Tamoni
  • Claudio Tebaldi


We propose a decomposition for time series in components classified by levels of persistence. Employing this decomposition, we provide empirical evidence that consumption growth contains predictable components highly correlated with well-known proxies of consumption variability. These components generate a term-structure of sizable risk premia. At low frequencies we identify a component correlated with long-run productivity growth and commanding a yearly premium of approximately 2%. At high frequencies we identify a component with yearly half-life, which contributes to the equity premium for another 2%. Accounting for persistence heterogeneity, we obtain an estimate of the IES strictly above one and robust across subsamples. The Author 2013. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail:, Oxford University Press.

Suggested Citation

  • Fulvio Ortu & Andrea Tamoni & Claudio Tebaldi, 2013. "Long-Run Risk and the Persistence of Consumption Shocks," Review of Financial Studies, Society for Financial Studies, vol. 26(11), pages 2876-2915.
  • Handle: RePEc:oup:rfinst:v:26:y:2013:i:11:p:2876-2915

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    Cited by:

    1. Faria, Gonçalo & Verona, Fabio, 2018. "Forecasting stock market returns by summing the frequency-decomposed parts," Journal of Empirical Finance, Elsevier, vol. 45(C), pages 228-242.
    2. Jozef Barun'ik & Evv{z}en Kov{c}enda, 2018. "Total, asymmetric and frequency connectedness between oil and forex markets," Papers 1805.03980,, revised Feb 2019.
    3. Ian Dew-Becker & Stefano Giglio, 2016. "Asset Pricing in the Frequency Domain: Theory and Empirics," Review of Financial Studies, Society for Financial Studies, vol. 29(8), pages 2029-2068.
    4. repec:eee:empfin:v:44:y:2017:i:c:p:43-65 is not listed on IDEAS
    5. Dergunov, Ilya & Meinerding, Christoph & Schlag, Christian, 2019. "Extreme inflation and time-varying consumption growth," Discussion Papers 16/2019, Deutsche Bundesbank.
    6. repec:eee:ecofin:v:42:y:2017:i:c:p:461-472 is not listed on IDEAS
    7. Federico M. Bandi & Bernard Perron & Andrea Tamoni & Claudio Tebaldi, 2014. "The scale of predictability," Working Papers 509, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    8. Matteo Barigozzi & Marc Hallin & Stefano Soccorsi, 2019. "Time-Varying General Dynamic Factor Models and the Measurement of Financial Connectedness," Working Papers 257939806, Lancaster University Management School, Economics Department.
    9. Thomas Conlon & John Cotter & Ramazan Gençay, 2015. "Long-run international diversification," Working Papers 201502, Geary Institute, University College Dublin.
    10. repec:eee:ejores:v:271:y:2018:i:2:p:676-696 is not listed on IDEAS
    11. repec:bla:jecsur:v:31:y:2017:i:1:p:226-257 is not listed on IDEAS
    12. Jozef Barun'ik & Matv{e}j Nevrla, 2018. "Tail Risks, Asset prices, and Investment Horizons," Papers 1806.06148,
    13. repec:eee:empfin:v:51:y:2019:i:c:p:95-118 is not listed on IDEAS
    14. Bandi, F.M & Perron, B & Tamoni, Andrea & Tebaldi, C., 2018. "The scale of predictability," LSE Research Online Documents on Economics 85646, London School of Economics and Political Science, LSE Library.
    15. David Dillenberger & Daniel Gottlieb & Pietro Ortoleva, 2018. "Stochastic Impatience and the Separation of Time and Risk Preferences," PIER Working Paper Archive 18-020, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 08 Sep 2018.
    16. repec:eee:empfin:v:46:y:2018:i:c:p:111-129 is not listed on IDEAS
    17. Federico Severino, 2016. "Isometric operators on Hilbert spaces and Wold decomposition of stationary time series," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 39(2), pages 203-234, November.
    18. repec:ebl:ecbull:eb-19-00123 is not listed on IDEAS
    19. Malkhozov, Aytek & Tamoni, Andrea, 2015. "News shocks and asset prices," LSE Research Online Documents on Economics 62004, London School of Economics and Political Science, LSE Library.
    20. repec:eee:econom:v:208:y:2019:i:1:p:120-140 is not listed on IDEAS

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