Long Run Risk: Is It There?

88 Pages Posted: 12 Apr 2015 Last revised: 20 Feb 2021

See all articles by Yukun Liu

Yukun Liu

University of Rochester - Simon Business School

Ben Matthies

University of Notre Dame

Date Written: February 1, 2021

Abstract

This paper documents the existence of a persistent component 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 between 23 and 38 percent of cumulative future consumption growth at the 5-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 our 1-factor model outperforms many benchmark macro- and return-based 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? (February 1, 2021). Available at SSRN: https://ssrn.com/abstract=2592814 or http://dx.doi.org/10.2139/ssrn.2592814

Yukun Liu

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

Ben Matthies (Contact Author)

University of Notre Dame ( email )

South Bend, CT
United States

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