Consumption Strikes Back? Measuring Long-Run Risk

Posted: 16 Feb 2017

See all articles by Lars Peter Hansen

Lars Peter Hansen

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

John Heaton

University of Chicago - Finance

Nan Li

Shanghai Jiao Tong University, Antai College of Economics and Management

Multiple version iconThere are 2 versions of this paper

Date Written: 2008

Abstract

We characterize and measure a long-term risk-return trade-off for the valuation of cash flows exposed to fluctuations in macroeconomic growth. This trade-off features risk prices of cash flows that are realized far into the future but continue to be reflected in asset values. We apply this analysis to claims on aggregate cash flows and to cash flows from value and growth portfolios by imputing values to the long-run dynamic responses of cash flows to macroeconomic shocks. We explore the sensitivity of our results to features of the economic valuation model and of the model cash flow dynamics.

JEL Classification: G12

Suggested Citation

Hansen, Lars Peter and Heaton, John C and Li, Nan, Consumption Strikes Back? Measuring Long-Run Risk (2008). Journal of Political Economy, Vol. 116, No. 2, 2008. Available at SSRN: https://ssrn.com/abstract=2918695

Lars Peter Hansen

University of Chicago - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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John C Heaton

University of Chicago - Finance ( email )

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Chicago, IL 60637
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Nan Li (Contact Author)

Shanghai Jiao Tong University, Antai College of Economics and Management ( email )

1954 Hua Shan Road
Shanghai Jiao Tong University
Shanghai, Shanghai 200030
China

HOME PAGE: http://www.nanlifinance.org/

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