Long Run Risk: Is It There?

47 Pages Posted: 12 Apr 2015 Last revised: 18 Nov 2018

See all articles by Yukun Liu

Yukun Liu

Yale University, Department of Economics, Students

Ben Matthies

Yale University, School of Management, Students

Date Written: January 1, 2018

Abstract

This paper documents the existence of long run risk in consumption growth. We take a novel approach using news coverage to capture investor concern about economic growth prospects. We provide evidence that consumption growth is highly predictable over long horizons - our measure explains up to 24 percent of cumulative future consumption growth at the 6-year horizon and beyond. Furthermore, we show a strong connection between this predictability and asset prices. Innovations to our measure price 51 standard portfolios in the cross-section and this 1-factor model outperforms many benchmark multi-factor models.

Keywords: Long Run Risk, News, Macroeconomy and Asset Prices, Factor Model, Consumption Growth

JEL Classification: E00, G12

Suggested Citation

Liu, Yukun and Matthies, Ben, Long Run Risk: Is It There? (January 1, 2018). Available at SSRN: https://ssrn.com/abstract=2592814 or http://dx.doi.org/10.2139/ssrn.2592814

Yukun Liu

Yale University, Department of Economics, Students ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States

Ben Matthies (Contact Author)

Yale University, School of Management, Students ( email )

New Haven, CT
United States
8606175089 (Phone)

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