Estimating and Testing Long-Run Risk Models: International Evidence

51 Pages Posted: 1 Jun 2021

See all articles by Andras Fulop

Andras Fulop

ESSEC Business School

Junye Li

Fudan University - School of Management

Hening Liu

University of Manchester - Alliance Manchester Business School

Cheng Yan

University of Essex - Essex Business School

Date Written: June 1, 2021

Abstract

We estimate and test long-run risk models using international macroeconomic and financial data. The benchmark model features a representative agent who has recursive preferences with a time preference shock, a persistent component in expected consumption growth, and stochastic volatility in fundamentals characterized by an autoregressive Gamma process. We construct a comprehensive dataset with quarterly frequency in the post-war period for ten developed countries and employ an efficient likelihood-based Bayesian method that exploits up-to-date sequential Monte Carlo methods to make full econometric inference. Our estimation provides international evidence in support of long-run risks, time-varying preference shocks, and countercyclicality of the stochastic discount factor.

Keywords: Consumption-based Asset Pricing, Long-Run Risks, Stochastic Discount Factor, Equity Premium Puzzle, Autoregressive Gamma Process, Projection Methods, Sequential Monte Carlo

JEL Classification: C11, C32, C58, E44, G12

Suggested Citation

Fulop, Andras and Li, Junye and Liu, Hening and Yan, Cheng, Estimating and Testing Long-Run Risk Models: International Evidence (June 1, 2021). Available at SSRN: https://ssrn.com/abstract=3857366 or http://dx.doi.org/10.2139/ssrn.3857366

Andras Fulop

ESSEC Business School ( email )

3 Avenue Bernard Hirsch
CS 50105 CERGY
CERGY, CERGY PONTOISE CEDEX 95021
France

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

Junye Li (Contact Author)

Fudan University - School of Management ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China

Hening Liu

University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Cheng Yan

University of Essex - Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

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