The Resolution of Long-Run Risk

33 Pages Posted: 24 May 2019

See all articles by Myroslav Pidkuyko

Myroslav Pidkuyko

University of Manchester - Department of Economics

Raffaele Rossi

University of Manchester - Department of Economics

Klaus Reiner Schenk-Hoppé

University of Manchester - Department of Economics; Norwegian School of Economics (NHH) - Department of Finance

Date Written: April 10, 2019

Abstract

Long-run risk models, a cornerstone in the macro-finance literature for their ability to capture key asset price phenomena, are known to entail implausibly high levels of timing and risk premia. Our paper resolves this puzzle by considering consumption of durable goods in addition to that of non-durable goods. In our estimated model, the timing premium is 11 percent and the risk premium is 16 percent of lifetime consumption. These values are about a third of the previously implied premia and are more consistent with empirical and experimental evidence.

Keywords: Durable Goods, Long-Run Risk Models, Particle Filtering, Timing and Risk Premium

JEL Classification: C11, E21, G11, G12

Suggested Citation

Pidkuyko, Myroslav and Rossi, Raffaele and Schenk-Hoppé, Klaus Reiner, The Resolution of Long-Run Risk (April 10, 2019). Available at SSRN: https://ssrn.com/abstract=3370185 or http://dx.doi.org/10.2139/ssrn.3370185

Myroslav Pidkuyko (Contact Author)

University of Manchester - Department of Economics ( email )

Arthur Lewis Building
Oxford Road
Manchester, M13 9PL
United Kingdom
447538278604 (Phone)

Raffaele Rossi

University of Manchester - Department of Economics

Arthur Lewis Building
Oxford Road
Manchester, M13 9PL
United Kingdom

Klaus Reiner Schenk-Hoppé

University of Manchester - Department of Economics ( email )

Arthur Lewis Building
Oxford Road
Manchester, M13 9PL
United Kingdom

Norwegian School of Economics (NHH) - Department of Finance ( email )

Helleveien 30
N-5045 Bergen
Norway

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