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

  • Ravi Bansal
  • Dana Kiku
  • Amir Yaron

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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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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