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http://ssrn.com/abstract=760169
 
 

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Consumption Strikes Back?: Measuring Long-Run Risk


Lars Peter Hansen


University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

John Heaton


University of Chicago - Finance

Nan Li


National University of Singapore

July 2005

NBER Working Paper No. w11476

Abstract:     
We characterize and measure a long-run risk return tradeoff for the valuation of financial cash flows that are exposed to fluctuations in macroeconomic growth. This tradeoff features components of financial cash flows that are only realized far into the future but are still reflected in current asset values. We use the recursive utility model with empirical inputs from vector autoregressions to quantify this relationship; and we study the long-run risk differences in aggregate securities and in portfolios constructed based on the ratio of book equity to market equity. Finally, we explore the resulting measurement challenges and the implied sensitivity to alternative specifications of stochastic growth.

Number of Pages in PDF File: 56

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Date posted: August 9, 2005  

Suggested Citation

Hansen, Lars Peter and Heaton, John and Li, Nan, Consumption Strikes Back?: Measuring Long-Run Risk (July 2005). NBER Working Paper No. w11476. Available at SSRN: http://ssrn.com/abstract=760169

Contact Information

Lars Peter Hansen (Contact Author)
University of Chicago - Department of Economics ( email )
1101 E 58th ST
Chicago, IL 60637
United States
773-702-8170 (Phone)
773-702-8490 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
John C Heaton
University of Chicago - Finance ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
Nan Li
National University of Singapore ( email )
15 Kent Ridge Drive
Singapore, 119245
Singapore
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