Working Paper: NBER ID: w17848
Authors: Wayne E. Ferson; Suresh K. Nallareddy; Biqin Xie
Abstract: This paper studies the ability of long-run risk models to explain out-of-sample asset returns during 1931-2009. The long-run risk models perform relatively well on the momentum effect. A cointegrated version of the model outperforms the classical, stationary version. Both the long-run and the short run consumption shocks in the models are empirically important for the models' performance. The models' average pricing errors are especially small in the decades from the 1950s to the 1990s. When we restrict the risk premiums to identify structural parameters, this results in larger average pricing errors but often smaller error variances. The mean squared errors are not substantially better than those of the classical CAPM, except for Momentum.
Keywords: longrun risk models; asset returns; equity premium; momentum effect
JEL Codes: E21; E27; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| consumption shocks (E21) | asset returns (G19) |
| long-run consumption shocks (D15) | asset pricing (G19) |
| short-run consumption shocks (E21) | asset pricing (G19) |
| cointegrated model (C32) | ability to explain momentum (E41) |
| stationary model (E10) | ability to explain momentum (E41) |
| restricting risk premiums (G12) | average pricing errors (P22) |