Asset Return Predictability in a Heterogeneous Agent Equilibrium Model

57 Pages Posted: 23 Jan 2015

See all articles by Murray Carlson

Murray Carlson

University of British Columbia (UBC) - Sauder School of Business

David A. Chapman

McIntire School, University of Virginia

Ron Kaniel

University of Rochester - Simon Business School; CEPR

Hong Yan

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Date Written: January 2015

Abstract

We use a general equilibrium model as a laboratory for generating predictable excess returns and for assessing the properties of the estimated consumption/portfolio rules, under both the empirical and the true dynamics of excess returns. The advantage of this approach, relative to the existing literature, is that the equilibrium model delineates the precise nature of the risk/return trade-off within an optimizing setting that endogenizes return predictability. In the experiments that we consider, the estimation issues are so severe that simple unconditional consumption and portfolio rules actually outperform (in a utility cost sense) both simple and bias-corrected empirical estimates of conditionally optimal policies.

Keywords: consumption, equilibrium, excess returns, hedging, predictable

JEL Classification: E21, G11, G12

Suggested Citation

Carlson, Murray D. and Chapman, David A. and Kaniel, Ron and Yan, Hong, Asset Return Predictability in a Heterogeneous Agent Equilibrium Model (January 2015). CEPR Discussion Paper No. DP10328. Available at SSRN: https://ssrn.com/abstract=2554402

Murray D. Carlson (Contact Author)

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-822-8358 (Phone)

David A. Chapman

McIntire School, University of Virginia ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States

HOME PAGE: http://https://sites.google.com/site/davidchapmanswebsite/

Ron Kaniel

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

HOME PAGE: http://rkaniel.simon.rochester.edu

CEPR ( email )

London
United Kingdom

Hong Yan

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

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