Long-Run Risk and the Persistence of Consumption Shocks
Review of Financial Studies
2013
We propose a decomposition for time series in components classified by levels of persistence. Employing this decomposition, we provide empirical evidence that consumption growth contains predictable components highly correlated with well-known proxies of consumption variability. These components generate a term-structure of sizable risk premia. At low frequencies we identify a component correlated with long-run productivity growth and commanding a yearly premium of approximately 2%. At high frequencies we identify a component with yearly half-life, which contributes to the equity premium for another 2%. Accounting for persistence heterogeneity, we obtain an estimate of the IES strictly above one and robust across subsamples.
- DOI
- 10.1093/rfs/hht038
- Volume
- 26 (11)
- Pages
- 2876-2915
- Language
- en
- Export
- BibTeX
- Sources
- openalex crossref