An Empirical Evaluation of the Long-Run Risks Model for Asset Prices

Ravi Bansal, Dana Kiku and Amir Yaron

No 15504, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We provide an empirical evaluation of the forward-looking long-run risks (LRR) model and highlight model differences with the backward-looking habit based asset pricing model. We feature three key results: (i) Consistent with the LRR model, there is considerable evidence in the data of time-varying expected consumption growth and volatility, (ii) The LRR model matches the key asset markets data features, (iii) In the data and in the LRR model accordingly, past consumption growth does not predict future asset prices, whereas lagged consumption in the habit model forecasts future price-dividend ratios with an R2 of over 40%. Overall, our evidence implies that the LRR model provides a coherent framework to analyze and interpret asset prices.

JEL-codes: E0 G0 G1 G12 G14 (search for similar items in EconPapers)
Date: 2009-11
New Economics Papers: this item is included in nep-bec, nep-cba and nep-mac
Note: AP CF
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Citations: View citations in EconPapers (25)

Published as "An Empirical Evaluation of the Long-Run Risks Model for Asset Prices", (Dana Kiku and Amir Yaron) Critical Finance Review 2012: Vol. 1:No 1, pp 183-221.

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Journal Article: An Empirical Evaluation of the Long-Run Risks Model for Asset Prices (2012)
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