Article2012

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

420 citations0/0 files storedCritical Finance Review

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Financial Markets and Investment Strategies Stochastic processes and financial applications Economic theories and models

Abstract

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

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References

1992The Cross-Section of Expected Stock Returns 1999By Force of Habit: A Consumption‐Based Explanation of Aggregate Stock Market Behavior 1989Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework 2000Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles n.d.Output Fluctuations in the United States: What Has Changed since the Early 1980's?2001Non-Gaussian Ornstein–Uhlenbeck-based Models and Some of Their Uses in Financial Economics 1992Dividend Yields and Expected Stock Returns: Alternative Procedures for Inference and Measurement 1981Intertemporal Substitution in Consumption

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2018The Social Cost of Carbon with Economic and Climate Risks 2012The Long-Run Risks Model and Aggregate Asset Prices: An Empirical Assessment 2013Volatility, the Macroeconomy, and Asset Prices 2018An intertemporal CAPM with stochastic volatility 2017Macro-Finance 2014

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