A Two-Step Indirect Inference Approach to Estimate the Long-Run Risk Asset Pricing Model

73 Pages Posted: 10 Aug 2016 Last revised: 27 May 2017

See all articles by Joachim Grammig

Joachim Grammig

Eberhard Karls Universitaet Tübingen; Centre for Financial Research (CfR); Center for Financial Studies (CfS)

Eva-Maria Küchlin

Eberhard Karls Universitaet Tuebingen

Multiple version iconThere are 2 versions of this paper

Date Written: May 27, 2017

Abstract

The long-run consumption risk model provides a theoretically appealing explanation for prominent asset pricing puzzles, but its intricate structure presents a challenge for econometric analysis. This paper proposes a two-step indirect inference approach that disentangles the estimation of the model's macro-economic dynamics and the investor's preference parameters. A Monte Carlo study explores the feasibility and efficiency of the estimation strategy. We apply the method to recent U.S.\data and provide a critical re-assessment of the long-run risk model's ability to reconcile the real economy and financial markets. This two-step indirect inference approach is potentially useful for the econometric analysis of other prominent consumption-based asset pricing models that are equally difficult to estimate.

Keywords: indirect inference estimation, asset pricing, long-run risk

JEL Classification: C58, G10, G12

Suggested Citation

Grammig, Joachim and Küchlin, Eva-Maria, A Two-Step Indirect Inference Approach to Estimate the Long-Run Risk Asset Pricing Model (May 27, 2017). Available at SSRN: https://ssrn.com/abstract=2820506 or http://dx.doi.org/10.2139/ssrn.2820506

Joachim Grammig (Contact Author)

Eberhard Karls Universitaet Tübingen ( email )

Mohlstrasse 36
D-72074 Tuebingen, 72074
Germany

HOME PAGE: http://www.uni-tuebingen.de/uni/wwo/Grammig/grammigeng.html

Centre for Financial Research (CfR) ( email )

Albertus-Magnus Platz
Cologne, 50923
Germany

Center for Financial Studies (CfS) ( email )

Taunusanlage 6
Frankfurt/Germany, D-60329
Germany

Eva-Maria Küchlin

Eberhard Karls Universitaet Tuebingen ( email )

Mohlstrasse 36
Tuebingen, 72074
Germany

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