Consumption Strikes Back?: Measuring Long-Run Risk

56 Pages Posted: 9 Aug 2005

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: July 2005

Abstract

We characterize and measure a long-run risk return tradeoff for the valuation of financial cash flows that are exposed to fluctuations in macroeconomic growth. This tradeoff features components of financial cash flows that are only realized far into the future but are still reflected in current asset values. We use the recursive utility model with empirical inputs from vector autoregressions to quantify this relationship; and we study the long-run risk differences in aggregate securities and in portfolios constructed based on the ratio of book equity to market equity. Finally, we explore the resulting measurement challenges and the implied sensitivity to alternative specifications of stochastic growth.

Suggested Citation

Hansen, Lars Peter and Heaton, John C and Li, Nan, Consumption Strikes Back?: Measuring Long-Run Risk (July 2005). NBER Working Paper No. w11476. Available at SSRN: https://ssrn.com/abstract=760169

Lars Peter Hansen (Contact Author)

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

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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