The "out-of-sample" performance of long run risk models

Journal Article (Journal Article)

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. © 2012 Elsevier B.V.

Full Text

Duke Authors

Cited Authors

  • Ferson, W; Nallareddy, S; Xie, B

Published Date

  • March 1, 2013

Published In

Volume / Issue

  • 107 / 3

Start / End Page

  • 537 - 556

International Standard Serial Number (ISSN)

  • 0304-405X

Digital Object Identifier (DOI)

  • 10.1016/j.jfineco.2012.09.006

Citation Source

  • Scopus