Constantinides, George M. and Ghosh, Anisha (2008) Asset pricing tests with long run risks in consumption growth. Discussion paper, 609. Financial Markets Group, London School of Economics and Political Science, London, UK.
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The Bansal and Yaron (2004) model of long run risks (LLR) in aggregate consumption and dividend growth and its extension that captures potential co- integration of the consumption and dividend levels, are tested on a cross-section of asset classes and rejected using annual data over the period 1930-2006 and using both annual and quarterly data over the post-war period. The reversal of earlier empirical conclusions is partly due to the increase in the power of the tests resulting from two observations under the null. First, the latent state vari- ables and, therefore, the pricing kernel are known a¢ ne functions of observables such as the interest rate and the market-wide price-dividend ratio. Second, the parameters of the time-series processes of consumption and dividend growth, the LLR variable, and its conditional variance impose constraints on the parameters of the pricing kernel. The value of the persistence parameter of the LRR variable that best …ts the data implies that its half-life is shorter than that of the business cycle.
|Item Type:||Monograph (Discussion Paper)|
|Additional Information:||© 2008 The Authors|
|Uncontrolled Keywords:||Long Run Risks, Equity Premium, Cross-Section of Asset Re- turns, Cointegration, Latent State Variables.|
|Library of Congress subject classification:||H Social Sciences > HB Economic Theory|
|Journal of Economic Literature Classification System:||G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy
|Sets:||Research centres and groups > Financial Markets Group (FMG)
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