Measuring Long Run Risks for Brazil

Caio Almeida () and Diego Brandao

Brazilian Review of Econometrics, 2019, vol. 39, issue 1

Abstract: We study the temporal structure of risk prices, risk exposures and expected market returns for Brazil assuming the economy follows a long run risks model. The model consists on an endowment economy where aggregate consumption and dividend growth contain predictable components, and a representative agent has Epstein-Zin recursive preferences with CES specification. We show that aggregate consumption in Brazil is sufficiently predictable to generate risk premia associated with Epstein-Zin preferences in excess of traditional compensations induced by power utility. Moreover, risk compensation is dominated by permanent shocks both in the short and long run, as Epstein-Zin preferences mitigate the price of temporary shocks' risk.

Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:sbe:breart:v:39:y:2019:i:1:a:77132

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