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

38 Pages Posted: 17 Nov 2009 Last revised: 19 Nov 2009

See all articles by Ravi Bansal

Ravi Bansal

Duke University and NBER

Dana Kiku

University of Illinois at Urbana-Champaign

Amir Yaron

University of Pennsylvania -- Wharton School of Business; National Bureau of Economic Research (NBER)

Date Written: November 2009

Abstract

We provide an empirical evaluation of the forward-looking long-run risks (LRR) model and highlight model differences with the backward-looking habit based asset pricing model. We feature three key results: (i) Consistent with the LRR model, there is considerable evidence in the data of time-varying expected consumption growth and volatility, (ii) The LRR model matches the key asset markets data features, (iii) In the data and in the LRR model accordingly, past consumption growth does not predict future asset prices, whereas lagged consumption in the habit model forecasts future price-dividend ratios with an R2 of over 40%. Overall, our evidence implies that the LRR model provides a coherent framework to analyze and interpret asset prices.

Suggested Citation

Bansal, Ravi and Kiku, Dana and Yaron, Amir, An Empirical Evaluation of the Long-Run Risks Model for Asset Prices (November 2009). NBER Working Paper No. w15504, Available at SSRN: https://ssrn.com/abstract=1505828

Ravi Bansal

Duke University and NBER ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7758 (Phone)
919-660-8038 (Fax)

Dana Kiku

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL 61820
United States

Amir Yaron (Contact Author)

University of Pennsylvania -- Wharton School of Business ( email )

The Wharton School
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Philadelphia, PA 19104
United States
215-898-1241 (Phone)
215-898-6200 (Fax)

National Bureau of Economic Research (NBER) ( email )

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United States

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