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The Resolution of Long-Run Risk

Author

Listed:
  • Myroslav Pidkuyko
  • Raffaele Rossi
  • Klaus Reiner Schenk-Hoppé

Abstract

Long-run risk models, a cornerstone in the macro-finance literature for their ability to capture key asset price phenomena, are known to entail implausibly high levels of timing and risk premia. Our paper resolves this puzzle by considering consumption of durable goods in addition to that of non-durable goods. In our estimated model, the timing premium is 11 percent and the risk premium is 16 percent of lifetime consumption. These values are about a third of the previously implied premia and are more consistent with empirical and experimental evidence.

Suggested Citation

  • Myroslav Pidkuyko & Raffaele Rossi & Klaus Reiner Schenk-Hoppé, 2019. "The Resolution of Long-Run Risk," Economics Discussion Paper Series 1908, Economics, The University of Manchester.
    • Handle: RePEc:man:sespap:1908
    as

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    File URL: http://hummedia.manchester.ac.uk/schools/soss/economics/discussionpapers/EDP-1908.pdf
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    References listed on IDEAS

    as
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    More about this item

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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