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Long-run risk and the persistence of consumption shocks

Ortu, F. and Tamoni, Andrea and Tebaldi, C. (2013) Long-run risk and the persistence of consumption shocks. Review of Financial Studies, 26 (11). pp. 2876-2915. ISSN 0893-9454

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Identification Number: 10.1093/rfs/hht038

Abstract

We propose a decomposition for time series in components classified by levels of persistence. Employing this decomposition, we provide empirical evidence that consumption growth contains predictable components highly correlated with well-known proxies of consumption variability. These components generate a term-structure of sizable risk premia. At low frequencies we identify a component correlated with long-run productivity growth and commanding a yearly premium of approximately 2%. At high frequencies we identify a component with yearly half-life, which contributes to the equity premium for another 2%. Accounting for persistence heterogeneity, we obtain an estimate of the IES strictly above one and robust across subsamples.

Item Type: Article
Official URL: http://rfs.oxfordjournals.org/
Additional Information: © 2013 The Authors
Subjects: H Social Sciences > HG Finance
Sets: Departments > Finance
Collections > Economists Online
Date Deposited: 18 Oct 2013 13:41
Last Modified: 27 Jun 2014 10:09
Funders: Bocconi University
URI: http://eprints.lse.ac.uk/id/eprint/53611

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