How Risky Is Consumption in the Long-Run? Benchmark Estimates from a Robust Estimator

Ian Dew-Becker

The Review of Financial Studies, 2017, vol. 30, issue 2, 631-666

Abstract: The long-run standard deviation (LRSD) of consumption growth is a key moment in determining risk premiums under Epstein-Zin preferences. Standard estimators of the LRSD are biased downward and have poor confidence interval coverage, making them overreject the long-run risk model. This paper studies a new estimator with smaller bias and accurate confidence intervals. Standard long-run risk calibrations are still rejected in the data. The LRSD of consumption growth in the postwar sample is estimated to be 2.5% per year with an upper bound to the 95% confidence interval of 4.9%. These values can be taken as benchmarks for future calibrations.Received October 29, 2014; accepted February 18, 2016 by Editor Leonid Kogan.

JEL-codes: C22 E21 G12 (search for similar items in EconPapers)
Date: 2017
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