Long Run Risk: Is It There?
47 Pages Posted: 12 Apr 2015 Last revised: 18 Nov 2018
Date Written: January 1, 2018
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: Suggested Citation