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

  • Ravi Bansal 1
  • Dana Kiku 2
  • Amir Yaron 3

[1]Ravi Bansal, Fuqua School of Business, Duke University, and NBER, ravi.bansal@duke.edu [2]Dana Kiku, The Wharton School, University of Pennsylvania, kiku@wharton.upenn.edu [3]Amir Yaron, The Wharton School, University of Pennsylvania, and NBER, yaron@wharton.upenn.edu

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Table of contents

1 Introduction
2 Long-Run Risks Model
3 Data
4 Empirical Findings
5 Conclusions
Appendix
Acknowledgments
References

Critical Finance Review

(Vol 1, Issue 1, 2012, pp 183-221)

DOI: 10.1561/104.00000005

Abstract

We provide an empirical evaluation of the Long-Run Risks (LRR) model, and highlight important differences in the asset pricing implications of the LRR model relative to the habit model. We feature three key results: (i) consistent with the LRR model there is considerable evidence in the data for time-varying expected consumption growth and consumption volatility, (ii) the LRR model matches the key asset markets data features, (iii) in the data and in the LRR model accordingly, lagged consumption growth does not predict the future price-dividend ratio, while in the habit-model it counterfactually predicts the future price-dividend with an R2 of over 40%. Overall, we find considerable empirical support for the LRR model.