A Likelihood-Based Comparison of Macro Asset Pricing Models

Andrew Chen, Rebecca Wasyk and Fabian Winkler

No 2017-024, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We estimate asset pricing models with multiple risks: long-run growth, long-run volatility, habit, and a residual. The Bayesian estimation accounts for the entire likelihood of consumption, dividends, and the price-dividend ratio. We find that the residual represents at least 80% of the variance of the price-dividend ratio. Moreover, the residual tracks most recognizable features of stock market history such as the 1990's boom and bust. Long run risks and habit contribute primarily in crises. The dominance of the residual comes from the low correlation between asset prices and consumption growth moments. We discuss theories which are consistent with our results.

Keywords: Bayesian Estimation; Equity Premium Puzzle; Excess Volatility; Habit; long-run risks; Particle Filter; Rare Disasters (search for similar items in EconPapers)
JEL-codes: C11 C15 E21 E30 G10 G12 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2017-03
New Economics Papers: this item is included in nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2017-24

DOI: 10.17016/FEDS.2017.024

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