How risky is consumption in the long-run? Benchmark estimates from a robust estimator

Ian Dew-Becker*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

6 Scopus citations

Abstract

The long-run standard deviation (LRSD) of consumption growth is a key moment in determining risk premiums under Epstein-Zin preferences. Standard estimators of the LRSD are biased downward and have poor confidence interval coverage, making them overreject the long-run risk model. This paper studies a new estimator with smaller bias and accurate confidence intervals. Standard long-run risk calibrations are still rejected in the data. The LRSD of consumption growth in the postwar sample is estimated to be 2.5% per year with an upper bound to the 95% confidence interval of 4.9%. These values can be taken as benchmarks for future calibrations.

Original languageEnglish (US)
Pages (from-to)631-666
Number of pages36
JournalReview of Financial Studies
Volume30
Issue number2
DOIs
StatePublished - Feb 2017

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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