Long Run Risk: Is It There?

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