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The Resolution of Long-Run Risk

Myroslav Pidkuyko, Raffaele Rossi () and Klaus Schenk-Hoppé

Economics Discussion Paper Series from Economics, The University of Manchester

Abstract: Long-run risk models, a cornerstone in the macro-finance literature for their ability to capture key asset price phenomena, are known to entail implausibly high levels of timing and risk premia. Our paper resolves this puzzle by considering consumption of durable goods in addition to that of non-durable goods. In our estimated model, the timing premium is 11 percent and the risk premium is 16 percent of lifetime consumption. These values are about a third of the previously implied premia and are more consistent with empirical and experimental evidence.

JEL-codes: C11 E21 G11 G12 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-rmg
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