Working Paper: NBER ID: w15504
Authors: Ravi Bansal; Dana Kiku; Amir Yaron
Abstract: We provide an empirical evaluation of the forward-looking long-run risks (LRR) model and highlight model differences with the backward-looking habit based asset pricing model. We feature three key results: (i) Consistent with the LRR model, there is considerable evidence in the data of time-varying expected consumption growth and volatility, (ii) The LRR model matches the key asset markets data features, (iii) In the data and in the LRR model accordingly, past consumption growth does not predict future asset prices, whereas lagged consumption in the habit model forecasts future price-dividend ratios with an R2 of over 40%. Overall, our evidence implies that the LRR model provides a coherent framework to analyze and interpret asset prices.
Keywords: No keywords provided
JEL Codes: E0; G0; G1; G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fluctuations in expected growth (E32) | asset prices (G19) |
| consumption volatility (E20) | asset prices (G19) |
| expected growth (O40) | consumption volatility (E20) |
| past consumption growth (E20) | asset prices (G19) |
| lagged consumption (E20) | price-dividend ratios (G35) |
| consumption volatility (E20) | price-dividend ratios (G35) |
| predictability of consumption growth (E21) | asset prices (G19) |