Estimating and Testing Long-Run Risk Models: International Evidence

Andras Fulop (), Junye Li (), Hening Liu () and Cheng Yan ()
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Andras Fulop: ESSEC Business School, Paris-Singapore, 95021 Cergy-Pontoise, France
Junye Li: School of Management, Fudan University, Shanghai 200433, China
Hening Liu: Alliance Manchester Business School, The University of Manchester, Manchester M15 6PB, United Kingdom
Cheng Yan: Essex Business School, University of Essex, Colchester CO4 3SQ, United Kingdom

Management Science, 2025, vol. 71, issue 4, 3517-3536

Abstract: We estimate and test long-run risk models using international macroeconomic and financial data. The benchmark model features a representative agent who has recursive preferences with a time preference shock, a persistent component in expected consumption growth, and stochastic volatility in fundamentals characterized by an autoregressive gamma process. We construct a comprehensive data set with quarterly frequency for 10 developed countries and employ an efficient likelihood-based Bayesian method that exploits up-to-date sequential Monte Carlo methods to make full econometric inference. Our empirical findings provide international evidence in support of long-run risks, time-varying preference shocks, and countercyclicality of the stochastic discount factor. We show the existence of a global long-run consumption factor driving equity returns across individual countries.

Keywords: consumption; equity premium; long-run risk; stochastic discount factor; projection methods; sequential Monte Carlo sampler (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:71:y:2025:i:4:p:3517-3536

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