A Likelihood-Based Comparison of Macro Asset Pricing Models

RePEc Short ID: pch1244
ORCID iD: 0000-0003-1153-3905

Chen, Andrew Y.; Wasyk, Rebecca; Winkler, Fabian

doi:10.17016/FEDS.2017.024

Working Paper

A Likelihood-Based Comparison of Macro Asset Pricing Models

Abstract: We estimate asset pricing models with multiple risks: long-run growth, long-run volatility, habit, and a residual. The Bayesian estimation accounts for the entire likelihood of consumption, dividends, and the price-dividend ratio. We find that the residual represents at least 80% of the variance of the price-dividend ratio. Moreover, the residual tracks most recognizable features of stock market history such as the 1990's boom and bust. Long run risks and habit contribute primarily in crises. The dominance of the residual comes from the low correlation between asset prices and consumption growth moments. We discuss theories which are consistent with our results.

Keywords: Bayesian Estimation; Equity Premium Puzzle; Excess Volatility; Habit; long-run risks; Particle Filter; Rare Disasters;

JEL Classification: G10; G12; E21; E30; C11; C15;

https://doi.org/10.17016/FEDS.2017.024