Long Run Risk, the Wealth-Consumption Ratio, and the Temporal Pricing of Risk
Representative agent consumption based asset pricing models have made great strides in accounting for many important features of asset returns. The long run risk (LRR) models of Ravi Bansal and Amir Yaron (2004) are a prime example of this progress. Yet, several other representative agent mode...
| Main Authors: | , , , |
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| Other Authors: | |
| Format: | Article |
| Language: | en_US |
| Published: |
American Economic Association
2011
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| Online Access: | http://hdl.handle.net/1721.1/67844 https://orcid.org/0000-0002-0319-5531 |
| _version_ | 1826190766780710912 |
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| author | Koijen, Ralph S. J. Lustig, Hanno Nieuwerburgh, Stijn Van Verdelhan, Adrien Frederic |
| author2 | Sloan School of Management |
| author_facet | Sloan School of Management Koijen, Ralph S. J. Lustig, Hanno Nieuwerburgh, Stijn Van Verdelhan, Adrien Frederic |
| author_sort | Koijen, Ralph S. J. |
| collection | MIT |
| description | Representative agent consumption based
asset pricing models have made great strides in
accounting for many important features of asset
returns. The long run risk (LRR) models of
Ravi Bansal and Amir Yaron (2004) are a prime
example of this progress. Yet, several other representative
agent models, such as the external
habit model of John Y. Campbell and John H.
Cochrane (1999) and the variable rare disasters
model of Xavier Gabaix (2008), seem to be able
to match a similar set of asset pricing moments.
Additional moments would be useful to help distinguish
between these models. Hanno Lustig,
Stijn Van Nieuwerburgh, and Adrien Verdelhan
(2009) argue that the wealth-consumption ratio
is such a moment. A comparison of the wealthconsumption
ratio in the LRR model and in the
data is favorable to the LRR model. This is no
small feat because the wealth-consumption ratio
is not a target in the usual calibrations of the
model, and the LRR is—so far—the sole model
able to reproduce both the equity premium and
the wealth-consumption ratio. The LRR model
matches the properties of the wealth-consumption
ratio despite the fact that it implies a negative
real bond risk premium. This is because it
generates quite a bit of consumption cash flow
risk to offset the negative discount rate risk. |
| first_indexed | 2024-09-23T08:45:02Z |
| format | Article |
| id | mit-1721.1/67844 |
| institution | Massachusetts Institute of Technology |
| language | en_US |
| last_indexed | 2024-09-23T08:45:02Z |
| publishDate | 2011 |
| publisher | American Economic Association |
| record_format | dspace |
| spelling | mit-1721.1/678442022-09-30T10:59:41Z Long Run Risk, the Wealth-Consumption Ratio, and the Temporal Pricing of Risk Koijen, Ralph S. J. Lustig, Hanno Nieuwerburgh, Stijn Van Verdelhan, Adrien Frederic Sloan School of Management Verdelhan, Adrien Frederic Verdelhan, Adrien Frederic Representative agent consumption based asset pricing models have made great strides in accounting for many important features of asset returns. The long run risk (LRR) models of Ravi Bansal and Amir Yaron (2004) are a prime example of this progress. Yet, several other representative agent models, such as the external habit model of John Y. Campbell and John H. Cochrane (1999) and the variable rare disasters model of Xavier Gabaix (2008), seem to be able to match a similar set of asset pricing moments. Additional moments would be useful to help distinguish between these models. Hanno Lustig, Stijn Van Nieuwerburgh, and Adrien Verdelhan (2009) argue that the wealth-consumption ratio is such a moment. A comparison of the wealthconsumption ratio in the LRR model and in the data is favorable to the LRR model. This is no small feat because the wealth-consumption ratio is not a target in the usual calibrations of the model, and the LRR is—so far—the sole model able to reproduce both the equity premium and the wealth-consumption ratio. The LRR model matches the properties of the wealth-consumption ratio despite the fact that it implies a negative real bond risk premium. This is because it generates quite a bit of consumption cash flow risk to offset the negative discount rate risk. 2011-12-21T18:31:12Z 2011-12-21T18:31:12Z 2010-05 Article http://purl.org/eprint/type/JournalArticle 0002-8282 1944-7981 http://hdl.handle.net/1721.1/67844 Koijen, Ralph S.J et al. “Long Run Risk, the Wealth-Consumption Ratio, and the Temporal Pricing of Risk.” American Economic Review 100 (2010): 552-556. Web. 21 Dec. 2011. © 2010 American Economic Association https://orcid.org/0000-0002-0319-5531 en_US http://dx.doi.org/10.1257/aer.100.2.552 American Economic Review Article is made available in accordance with the publisher's policy and may be subject to US copyright law. Please refer to the publisher's site for terms of use. application/pdf American Economic Association Prof. Verdelhan via Alex Caracuzzo |
| spellingShingle | Koijen, Ralph S. J. Lustig, Hanno Nieuwerburgh, Stijn Van Verdelhan, Adrien Frederic Long Run Risk, the Wealth-Consumption Ratio, and the Temporal Pricing of Risk |
| title | Long Run Risk, the Wealth-Consumption Ratio, and the Temporal Pricing of Risk |
| title_full | Long Run Risk, the Wealth-Consumption Ratio, and the Temporal Pricing of Risk |
| title_fullStr | Long Run Risk, the Wealth-Consumption Ratio, and the Temporal Pricing of Risk |
| title_full_unstemmed | Long Run Risk, the Wealth-Consumption Ratio, and the Temporal Pricing of Risk |
| title_short | Long Run Risk, the Wealth-Consumption Ratio, and the Temporal Pricing of Risk |
| title_sort | long run risk the wealth consumption ratio and the temporal pricing of risk |
| url | http://hdl.handle.net/1721.1/67844 https://orcid.org/0000-0002-0319-5531 |
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