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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
A Likelihood-Based Comparison of Macro Asset Pricing Models
Andrew Y. Chen
Rebecca Wasyk
Fabian Winkler
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.


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Andrew Y. Chen & Rebecca Wasyk & Fabian Winkler, A Likelihood-Based Comparison of Macro Asset Pricing Models, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2017-024, Mar 2017.
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Keywords: Bayesian Estimation ; Equity Premium Puzzle ; Excess Volatility ; Habit ; Long run risks ; Particle Filter ; Rare Disasters
DOI: 10.17016/FEDS.2017.024
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