The Long-Run Risks Model and Aggregate Asset Prices: An Empirical Assessment

52 Pages Posted: 17 Mar 2009  

Jason Beeler

Harvard University - Department of Economics

John Y. Campbell

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

Date Written: March 2009

Abstract

The long-run risks model of asset prices explains stock price variation as a response to persistent fluctuations in the mean and volatility of aggregate consumption growth, by a representative agent with a high elasticity of intertemporal substitution. This paper documents several empirical difficulties for the model as calibrated by Bansal and Yaron (BY, 2004) and Bansal, Kiku, and Yaron (BKY, 2007a). BY's calibration counterfactually implies that long-run consumption and dividend growth should be highly persistent and predictable from stock prices. BKY's calibration does better in this respect by greatly increasing the persistence of volatility fluctuations and their impact on stock prices. This calibration fits the predictive power of stock prices for future consumption volatility, but implies much greater predictive power of stock prices for future stock return volatility than is found in the data. Neither calibration can explain why movements in real interest rates do not generate strong predictable movements in consumption growth. Finally, the long-run risks model implies extremely low yields and negative term premia on inflation-indexed bonds.

Suggested Citation

Beeler, Jason and Campbell, John Y., The Long-Run Risks Model and Aggregate Asset Prices: An Empirical Assessment (March 2009). NBER Working Paper No. w14788. Available at SSRN: https://ssrn.com/abstract=1359504

Jason Beeler

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States

John Y. Campbell (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
Room 213
Cambridge, MA 02138
United States
617-496-6448 (Phone)
617-495-7730 (Fax)

HOME PAGE: http://scholar.harvard.edu/campbell

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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