From Which Consumption-Based Asset Pricing Models Can Investors Profit? Evidence from Model-Based Priors
This article analyzes whether consumption-based asset pricing models improve the excess returns forecasts of a hypothetical investor with access to these models from 1947 onwards. The investor imposes economic constraints derived from asset pricing models as model-based priors on predictive regressi...
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| Format: | Article |
| Language: | English |
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Oxford University Press
2022
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| Online Access: | View Fulltext in Publisher |
| Summary: | This article analyzes whether consumption-based asset pricing models improve the excess returns forecasts of a hypothetical investor with access to these models from 1947 onwards. The investor imposes economic constraints derived from asset pricing models as model-based priors on predictive regression parameters through a Bayesian framework. Three models are considered: habit formation, long-run risk, and prospect theory. The model-based priors generally perform better than priors that shrink the parameter estimates to the historical average model and priors that impose a positive equity premium. This analysis helps to assess the value of consumption-based asset pricing models to investors. © 2020 Published by Oxford University Press 2020. This work is written by a US Government employee and is in the public domain in the US. |
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| ISBN: | 14798409 (ISSN) |
| DOI: | 10.1093/jjfinec/nbaa023 |