Risks For the Long Run: Estimation and Inference ⁄

Abstract

In this paper we empirically evaluate the ability of the long-run risks model to explain asset returns. Exploiting asset pricing Euler equations we develop methods for estimating the long-run risks model, and show that it can successfully account for the market, value, and size sorted returns at reasonable values of risk aversion and the intertemporal elasticity of substitution. Our empirical evidence highlights the importance of low-frequency movements and time-varying uncertainty in economic growth for understanding risk-return tradeoffs in financial markets.