Review of Financial Studies Vol. 30 No. 2 2017
How Risky Is Consumption in the Long-Run? Benchmark Estimates from a Robust Estimator
Abstract
The long-run standard deviation (LRSD) of consumption growth is a key moment in determining risk premiums under Epstein-Zin preferences. Standard estimators of the LRSD are biased downward and have poor confidence interval coverage, making them overreject the long-run risk model. This paper studies a new estimator with smaller bias and accurate confidence intervals. Standard long-run risk calibrations are still rejected in the data. The LRSD of consumption growth in the postwar sample is estimated to be 2.5% per year with an upper bound to the 95% confidence interval of 4.9%. These values can be taken as benchmarks for future calibrations.
- DOI
- 10.1093/rfs/hhw015
- Volume
- 30
- Issue
- 2
- Pages
- 631-666
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref