A two-step indirect inference approach to estimate the long-run risk asset pricing model

  • The long-run consumption risk model provides a theoretically appealing explanation for prominent asset pricing puzzles, but its intricate structure presents a challenge for econometric analysis. This paper proposes a two-step indirect inference approach that disentangles the estimation of the model's macroeconomic dynamics and the investor's preference parameters. A Monte Carlo study explores the feasibility and efficiency of the estimation strategy. We apply the method to recent U.S. data and provide a critical re-assessment of the long-run risk model's ability to reconcile the real economy and financial markets. This two-step indirect inference approach is potentially useful for the econometric analysis of other prominent consumption-based asset pricing models that are equally difficult to estimate.

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Author:Joachim Grammig, Eva-Maria Küchlin
URN:urn:nbn:de:hebis:30:3-438582
URL:https://ssrn.com/abstract=3038722
Parent Title (English):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 572
Series (Serial Number):CFS working paper series (572)
Publisher:Center for Financial Studies
Place of publication:Frankfurt, M.
Document Type:Working Paper
Language:English
Year of Completion:2017
Year of first Publication:2017
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2017/10/17
Tag:asset pricing; indirect inference estimation; longrun risk
Issue:May 27, 2017
Page Number:76
HeBIS-PPN:419160841
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Sammlungen:Universitätspublikationen
Licence (German):License LogoDeutsches Urheberrecht