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Long-run risk and the persistence of consumption shocks

Ortu, F., 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


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:
Additional Information: © 2013 The Authors
Divisions: Finance
Subjects: H Social Sciences > HG Finance
JEL classification: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E21 - Macroeconomics: Consumption; Saving; Aggregate Physical and Financial Consumer Wealth
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations; Cycles
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy
G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
Date Deposited: 18 Oct 2013 13:41
Last Modified: 14 Apr 2024 02:09
Funders: Bocconi University

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