A two-step indirect inference approach to estimate the long-run risk asset pricing model

Arbeitspapier

The long-run consumption risk model provides a theoretically appealing explanation for prominent asset pricing puzzles, but its intricate structure presents a challenge for econometric analysis. This paper proposes a two-step indirect inference approach that disentangles the estimation of the model's macroeconomic dynamics and the investor's preference parameters. A Monte Carlo study explores the feasibility and efficiency of the estimation strategy. We apply the method to recent U.S. data and provide a critical re-assessment of the long-run risk model's ability to reconcile the real economy and financial markets. This two-step indirect inference approach is potentially useful for the econometric analysis of other prominent consumption-based asset pricing models that are equally difficult to estimate.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CFR Working Paper ; No. 17-01

Classification and Topics

• Classification: Wirtschaft ; Financial Econometrics ; General Financial Markets: General (includes Measurement and Data) ; Asset Pricing; Trading Volume; Bond Interest Rates
• Subject: indirect inference estimation ; asset pricing ; longrun risk

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Grammig, Joachim ; Küchlin, Eva-Maria
• Event: Veröffentlichung
• (who): University of Cologne, Centre for Financial Research (CFR)
• (where): Cologne
• (when): 2017

Further information

• Handle: http://hdl.handle.net/10419/162317
• Last update: 10.03.2025, 11:45 AM CET