TY  - JOUR
AU  - Constantinides,George M.
AU  - Ghosh,Anisha
TI  - Asset Pricing Tests with Long Run Risks in Consumption Growth
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14543
PY  - 2008
Y2  - December 2008
UR  - http://www.nber.org/papers/w14543
L1  - http://www.nber.org/papers/w14543.pdf
N1  - Author contact info:
George M. Constantinides
The University of Chicago
Booth School of Business
5807 South Woodlawn Avenue
Chicago, IL  60637
Tel: 773/702-7258
Fax: 773/753-8045
 (773) 753-8045
E-Mail: gmc@ChicagoBooth.edu

Anisha Ghosh
Tepper School of Business
Carnegie Mellon University
5000 Forbes Avenue
Pittsburgh PA 15213
Tel: +44(0)7711894066
Fax: +44(0)2078523580
E-Mail: anishagh@andrew.cmu.edu
AB  - A novel methodology in testing the long-run risks model of Bansal and Yaron (2004) is presented based on the observation that, under the null, the potentially latent state variables, "long-run risk" and the conditional variance of its innovation, are known a¢ ne functions of the observable market-wide price-dividend ratio and risk free rate. In linear forecasting regressions of consumption growth and returns by the price-dividend ratio and risk free rate, the model implies much higher forecastability than what is observed in the data over 1931 –2009. The co-integrated variant of the model by Bansal, Gallant, and Tauchen (2007), also implies much higher forecastability of returns than what is observed in the data. Finally, we reject the models' implications in jointly pricing the cross-section of returns and fitting the unconditional time series moments of consumption and dividend growth. The results suggest that either some important state variable is missing or that the models should be generalized in a way that the lagged price-dividend ratio and risk free enter the regressions in a non-linear fashion.
ER  -