Another Look at the (Ir)Relevance of Long-Run Risks for Equity Risk Premia

I investigate the empirical asset pricing implications of a three-factor macro model that extends the baseline consumption model Consumption Capital Asset Pricing Model (CCAPM) by adding the innovations in expected long-run consumption growth (consumption growth news) and expected long-run consumption variance (variance news) as risk factors. By using a reasonable cross-section of equity risk premia, such a model is largely rejected (both on statistical and economic grounds), as the factor risk prices are either insignificant and/or economically implausible, whereas the pricing errors are very large. Thus, long-run consumption risks (LRR) do not rescue the CCAPM, which represents a major challenge for the voluminous LRR literature.