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Identifying Long-Run Risks: A Bayesian Mixed-Frequency Approach

Author

Listed:
  • Dongho Song

    (University of Pennsylvania)

  • Amir Yaron

    (University of Pennsylvania)

  • Frank Schorfheide

    (University of Pennsylvania)

Abstract

We develop a nonlinear state-space model to capture the joint dynamics of consumption, dividend growth, and asset returns. Building on Bansal and Yaron (2004), the core of our model consists of an endowment economy that is, in part, driven by a common predictable component for consumption and dividend growth. The measurement equations of our state-space model are set up to allow the use of mixed-frequency data, i.e., annual consumption data from 1929 to 1959, monthly consumption data after 1959, and monthly asset return data throughout. Our Bayesian estimation provides strong evidence for a small predictable component in consumption growth (even if asset return data are omitted from the estimation); our measurement error specification implies that consumption is measured much more precisely at annual than monthly frequency; and the estimated model is able to capture key asset pricing facts of the data.

Suggested Citation

  • Dongho Song & Amir Yaron & Frank Schorfheide, 2013. "Identifying Long-Run Risks: A Bayesian Mixed-Frequency Approach," 2013 Meeting Papers 580, Society for Economic Dynamics.
    • Handle: RePEc:red:sed013:580
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    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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