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

76 Pages Posted: 20 Sep 2017 Last revised: 16 Jan 2018

See all articles by Joachim Grammig

Joachim Grammig

University of Tuebingen

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 macroeconomic 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). CFS Working Paper, No. 572, Available at SSRN: https://ssrn.com/abstract=3038722 or http://dx.doi.org/10.2139/ssrn.3038722

Joachim Grammig (Contact Author)

University of Tuebingen ( email )

Wilhelmstr. 19
72074 Tuebingen, Baden Wuerttemberg 72074
Germany

Eva-Maria Küchlin

Eberhard Karls Universitaet Tuebingen ( email )

Mohlstrasse 36
Tuebingen, 72074
Germany

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