Data Management

Long-Run Risks, The Macroeconomy, And Asset Prices

Date Added: Apr 2010
Format: PDF

In this paper the authors present a generalized LRR model, which allows studying the role of cyclical fluctuations and macroeconomic crises on asset prices and expected returns. The model contains a persistent expected consumption growth component, long-run variation in consumption volatility, and preference for early resolution of uncertainty. To evaluate the role of cyclical risks, they incorporate a cyclical component in consumption growth - this component is stationary in levels. To study financial market crises, they also entertain jumps in consumption growth and volatility.