Global Asset Pricing: Is There a Role for Long-run Consumption Risk?

Jesper Rangvid (), Maik Schmeling and Andreas Schrimpf
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Jesper Rangvid: Copenhagen Business School, Postal: Department of Finance, Copenhagen Business School, Solbjerg Plads 3, DK-2000 Frederiksberg, Denmark

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: We estimate long-run consumption-based asset pricing models using a comprehensive set of international test assets, including broad equity market portfolios, international value/growth portfolios, and international bond portfolios. We find that differences in returns across assets within a country are sometimes (and most prominently for the U.S.) better captured by the assets' exposure to long-run consumption risk as opposed to their exposure to one-period changes in consumption (the canonical consumption CAPM). Across countries, however, exposure to long-run consumption risk does not provide a better fit than the canonical consumption CAPM. Thus, when characterizing the cross-country distribution of returns, long-run consumption risk does not seem to play any particular role, even if long-run risk is important for explaining the cross section of expected returns in the U.S. Furthermore, we show that consumption growth is more predictable over short to medium-run horizons than over longer horizons and that empirical evidence of a declining risk aversion parameter estimate in long-run risk models has to be interpreted with care.

Keywords: International Asset Pricing; Long-run Consumption Risk (search for similar items in EconPapers)
JEL-codes: F30 G12 G15 (search for similar items in EconPapers)
Pages: 38
Date: 2009-11-01
New Economics Papers: this item is included in nep-bec
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Citations: View citations in EconPapers (2)

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