It
does. Depending on the forecast horizon, a one standard deviation
increase in our measure for ambiguity about consumption volatility
predicts a significant increase in average excess equity returns varying
between 200 and 600 basis points annualized. The ambiguity measure we
propose is easily obtained from the cross-section of analysts' forecasts
for aggregate output growth and represents a simple proxy for latent
factors in consumption-based asset pricing models. We estimate a version
of the long-run risks model, where the investor is concerned about a
potential misspecification of the variance dynamics. Since the usually
latent state variables are now observable, we can do this just based on
fundamental cash flow data, but without the use of asset pricing
information. The model produces return predictability patterns via the
variance premium, which are in line with the data. |
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