Critical Finance Review > Vol 1 > Issue 1

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

Ravi Bansal, Fuqua School of Business, Duke University, and NBER, ravi.bansal@duke.edu Dana Kiku, The Wharton School, University of Pennsylvania, kiku@wharton.upenn.edu Amir Yaron, The Wharton School, University of Pennsylvania, and NBER, yaron@wharton.upenn.edu
 
Suggested Citation
Ravi Bansal, Dana Kiku and Amir Yaron (2012), "An Empirical Evaluation of the Long-Run Risks Model for Asset Prices", Critical Finance Review: Vol. 1: No. 1, pp 183-221. http://dx.doi.org/10.1561/104.00000005

Published: 01 Jan 2012
© 2012 R. Bansal, D. Kiku and A. Yaron
 
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In this article:
1 Introduction
2 Long-Run Risks Model
3 Data
4 Empirical Findings
5 Conclusions
Appendix
Acknowledgments
References

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.

DOI:10.1561/104.00000005