Long Run Risks, the Macroeconomy, and Asset Prices

By Ravi Bansal, Dana Kiku, Amir Yaron. 2010

138 citations recorded by the source corpus.

Ravi Bansal and Amir Yaron (2004) developed the Long Run Risk (LRR) model which emphasizes the role of long run risks, that is, low-frequency movements in consumption growth rates and volatility, in accounting for a wide range of asset pricing puzzles. In this article we present a generalized LRR model, which allows us to study the role of cyclical fluctuations and macroeconomic crises on asset prices and expected returns. The Bansal and Yaron (2004) LRR model contains (i) a persistent expected consumption growth component, (ii) long-run variation in consumption volatility, and (iii) preference for early resolution of uncertainty. To evaluate the role of cyclical risks, we incorporate a cyclical component in consumption growth—this component is stationary in levels. To study financial market crises, we also entertain jumps in consumption growth and volatility. We find that the magnitude of risk compensation for cyclical risks in consumption critically depends on the magnitude of the intertemporal elasticity of substitution (IES). When the IES is larger than one, cyclical risks carry a very small risk premium. When IES is close to zero, the risk compensation for cyclical variations is large; however, in this case the risk-free rate is implausibly high (in excess of 10 percent). It is, therefore, unlikely that the compensation for cyclical risks is of economically significant magnitude. This implication is also consistent Long Run Risks and asset MaRkets †

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/2de0ba7505f7e05aab144c238c726cd0d98929b1

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Citations in the corpus

The Long-Run Risks Model and Aggregate Asset Prices: An Empirical Assessment (2012, background): “Their long-run risks model has attracted a great deal of attention, with important subsequent work by Bansal, Khatchatrian, and Yaron (2005), Bansal, Kiku, and Yaron (2007, 2010, 2011), Hansen, Heaton, and Li (2008), Bansal, Dittmar, and Kiku (2009), and Bansal and Shaliastovich (2009, 2010) among…”
Optimal climate change mitigation under long-term growth uncertainty: Stochastic integrated assessment and analytic findings (2014, methodology): “We base our choices of values for the disentangled preference on estimates by Vissing-Jørgensen & Attanasio (2003), Bansal & Yaron (2004), and Bansal et al. (2010), and Bansal et al.”
An Empirical Evaluation of the Long-Run Risks Model for Asset Prices (2009, methodology): “In terms of the data, Beeler and Campbell (2011) also use a sub-sample of post-war quarterly data from 1947 to 2008.”
Dividend Dynamics and the Term Structure of Dividend Strips (2015, unknown): “A noncomprehensive list includes Bansal, Dittmar, and Lundblad (2001) (2005), Hansen, Heaton, and Li (2008), Bansal, Dittmar, and Kiku (2009), and Bansal, Kiku, and Yaron (2010).”