Leventhal School of Accounting
University of Southern California
3670 Trousdale Avenue, Los Angeles CA 90089
Institutional Affiliation: university of southern california
NBER Working Papers and Publications
|February 2012||The "Out of Sample" Performance of Long-run Risk Models|
with Wayne E. Ferson, Suresh K. Nallareddy: w17848
This paper studies the ability of long-run risk models to explain out-of-sample asset returns during 1931-2009. The long-run risk models perform relatively well on the momentum effect. A cointegrated version of the model outperforms the classical, stationary version. Both the long-run and the short run consumption shocks in the models are empirically important for the models' performance. The models' average pricing errors are especially small in the decades from the 1950s to the 1990s. When we restrict the risk premiums to identify structural parameters, this results in larger average pricing errors but often smaller error variances. The mean squared errors are not substantially better than those of the classical CAPM, except for Momentum.
Published: "The 'out of sample' Performance of Long-run Risk Models," with Biqin Xie and Suresh Nallareddy, 2013, Journal of Financial Economics 107 (3) 537-556.