Consumption Strikes Back? Measuring Long-Run Risk

Lars Peter Hansen, John C. Heaton and Nan Li

Journal of Political Economy, 2008, vol. 116, issue 2, 260-302

Abstract: We characterize and measure a long-term risk-return trade-off for the valuation of cash flows exposed to fluctuations in macroeconomic growth. This trade-off features risk prices of cash flows that are realized far into the future but continue to be reflected in asset values. We apply this analysis to claims on aggregate cash flows and to cash flows from value and growth portfolios by imputing values to the long-run dynamic responses of cash flows to macroeconomic shocks. We explore the sensitivity of our results to features of the economic valuation model and of the model cash flow dynamics. (c) 2008 by The University of Chicago. All rights reserved.

Date: 2008
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Working Paper: Consumption Strikes Back?: Measuring Long-Run Risk (2005)
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