Long Run Risk Model and Equity Premium Puzzle in Thailand

Sartja Duangchaiyoosook and Weerachart Kilenthong

No 150, PIER Discussion Papers from Puey Ungphakorn Institute for Economic Research

Abstract: This paper shows that the long-run risk model of Bansal and Yaron (2004) can potentially solve the equity premium and risk-free rate puzzles in Thailand. In particular, the calibrated values of the risk aversion and the elasticity of intertemporal substitution are empirically plausible. Risk decomposition results indicate that long-run risk is the most important risk component relevant to asset prices; that is, asset prices in Thai financial markets are most sensitive to small changes in news regarding long-term expected growth rates. Volatility risk also has an impact on asset prices but its impact is just about a quarter of the impact of the long-run risk.

Keywords: Equity Premium Puzzle; Long-run Risk Model; Long-run Component Risk; Asset Pricing; Generalized Method of Moments (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2021-04
New Economics Papers: this item is included in nep-rmg, nep-sea and nep-upt
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