A0652
Title: On the consumption wealth return
Authors: Paul Schneider - USI Lugano and SFI (Switzerland) [presenting]
Paul Whelan - CUHK Business School (Hong Kong)
Marc Van Uffelen - USI Lugano and SFI (Switzerland)
Abstract: The consumption wealth return is the fundamental state variable in long-run risk models. As the discrete-time continuous-state long-run-risk economy is highly incomplete, the consumption wealth return is not uniquely determined in equilibrium, however. Extant literature uses log-linearization, or log-polynomial frameworks, largely guided by tractability rather than economic principles. The consumption wealth return that minimizes the Hansen-Jagannathan bound nonparametrically is estimated. The resulting asset pricing statistics starkly contrast those of existing approaches, and the empirical results strongly underline the need for economic principles in the specification and estimation of economic models. In fact, some qualitative predictions that were thought to be model-implied in long-run risk models after using log-linearization turn out to vanish under the minimum-variance specification.
