Full-Information Examinations of Long-Run Risks and Habit

60 Pages Posted: 1 Feb 2016 Last revised: 18 Oct 2018

See all articles by Andrew Y. Chen

Andrew Y. Chen

Federal Reserve Board

Fabian Winkler

Board of Governors of the Federal Reserve System

Rebecca Wasyk

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: October 10, 2018

Abstract

Many consumption-based models succeed in matching long lists of asset price moments. We show that the empirical fit is much worse in full-information estimations. We estimate a model with long-run risks, habit, and a residual using Bayesian methods. We find that long-run risks account for less than 25% of the variance of the price-dividend ratio. Habit's contribution is negligible. The residual is highly persistent, however. Filtered versions of our decomposition that focus on business-cycle frequencies find a much smaller residual. Business-cycle variation of the price-dividend ratio is 50% long-run growth, 20% long-run volatility, and 5% surplus consumption. These results are robust to the prior, including priors that assume long-run risks in consumption and highly persistent habit.

Keywords: Long run risks, Rare Disasters, Habit, Bayesian Estimation, Particle Filter, Time-Varying Beliefs, Time-Varying Preferences, Excess Volatility

JEL Classification: G10, G12, E21, E30, E44, C11, C15

Suggested Citation

Chen, Andrew Y. and Winkler, Fabian and Wasyk, Rebecca, Full-Information Examinations of Long-Run Risks and Habit (October 10, 2018). Available at SSRN: https://ssrn.com/abstract=2724651 or http://dx.doi.org/10.2139/ssrn.2724651

Andrew Y. Chen (Contact Author)

Federal Reserve Board ( email )

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Washington, DC 20551
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HOME PAGE: http://sites.google.com/site/chenandrewy/

Fabian Winkler

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://www.fabianwinkler.com

Rebecca Wasyk

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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