The "out-of-sample" performance of long run risk models

Wayne Ferson, Suresh Nallareddy, Biqin Xie

Research output: Contribution to journalArticle

21 Scopus citations

Abstract

This paper studies the ability of long-run risk models to explain out-of-sample asset returns during 1931-2009. The long-run risk models perform relatively well on the momentum effect.A cointegrated version of the model outperforms the classical, stationary version. Both the long-run and the short-run consumption shocks in the models are empirically important for the models' performance. The models' average pricing errors are especially small in the decades from the 1950s to the 1990s. When we restrict the risk premiums to identify structural parameters, this results in larger average pricing errors but often smaller error variances. The mean squared errors are not substantially better than those of the classical CAPM, except for Momentum.

Original languageEnglish (US)
Pages (from-to)537-556
Number of pages20
JournalJournal of Financial Economics
Volume107
Issue number3
DOIs
StatePublished - Mar 1 2013

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All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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