nep-bec New Economics Papers
on Business Economics
Issue of 2009‒12‒05
twenty-one papers chosen by
Christian Calmes
Universite du Quebec en Outaouais

  1. Aggregate Comovements, Anticipation, and Business Cycles. By David R.F. Love
  2. Alternating Offers Union-Firm Bargaining: Order of Play and Efficiency By Elie Appelbaum
  3. Tractability in Incentive Contracting By Edmans, Alex; Gabaix, Xavier
  4. Micro and macro indicators of competition: comparison and relation with productivity change By Polder, Michael; Veldhuizen, Erik; Bergen, Dirk van den; Pijll, Eugène van der
  5. Heterogeneous firms or heterogeneous workers? Implications for the exporter premium and the impact of labor reallocation on productivity By Irarrazabal, Alfonso; Moxnes, Andreas; Ulltveit-Moe, Karen-Helene
  6. Productivity, Welfare and Reallocation: Theory and Firm Level Evidence By Susanto Basu; Luigi Pascali; Fabio Schiantarelli; Luis Serven
  7. Foreign Competition and Small-Firm Entry in US Manufacturing By Robert M. Feinberg
  8. Consumption Dynamics in General Equilibrium : A Characterisation when Markets are Incomplete By Beker, Pablo; Subir Chattopadhyay
  9. Risk premia in general equilibrium By Olaf Posch
  10. Credit, Vacancies and Unemployment Fluctuations By Nicolas Petrosky-Nadeau
  11. The Relation between Housing and Financial Wealth: Evidence from Japanese Metropolitan Households By Yasuo Kawawaki
  12. Endogenous choice of bank liquidity: the role of fire sales By Acharya, Viral; Song Shin, Hyun; Yorulmazer, Tanju
  13. The total real capital structure analysis in the profits mass relevant for turnover By Caruntu, Constantin; Lapadusi, Mihaela Loredana
  14. Underpricing and CEO Stock Options: Do Board Characteristics Matter? By Chahine, Salim; Goergen, Marc
  15. On Loss Functions and Ranking Forecasting Performances of Multivariate Volatility Models By Sébastien Laurent; Jeroen Rombouts; Francesco Violente
  16. Monitoring Managers: Does it Matter? By Cornelli, Francesca; Kominek, Zbigniew; Ljungqvist, Alexander P.
  17. Growth and Survival Determinants of Chinese Private Firms: Fieldwork evidence and econometric estimates By Gavin C Reid; Zhibin Xu
  18. An Extended Macro-Finance Model with Financial Factors By Dewachter, Hans; Iania, Leonardo
  19. WHO MAKES A GOOD LEADER? COOPERATIVENESS, OPTIMISM AND LEADING-BY-EXAMPLE By Simon Gaechter; Daniele Nosenzo; Elke Renner; Martin Sefton
  20. Effect of Research and Development and Market Concentration on Merger Outcomes -- An Event Study of U.S. Horizontal Mergers1 By Ralph M. Sonenshine
  21. Global Asset Pricing: Is There a Role for Long-run Consumption Risk? By Jesper Rangvid; Maik Schmeling; Andreas Schrimpf

  1. By: David R.F. Love (Department of Economics, Brock University)
    Abstract: This paper shows that negative comovements between major macroeconomic variables at business-cycle frequencies are commonly observed, but that standard Real Business Cycle (RBC) theory fails to predict this feature of the data. We show that allowing for ``anticipation effects'' in response to ``news shocks'' enables standard RBC models to predict both the observed patterns of negative comovement and overall positive correlations. Anticipation also improves magnification of shocks in the model without harming predictions for the other second moments central to RBC studies. Anticipation effects improve on standard RBC frameworks by offering an empirically plausible explanation for the nontrivial fraction of time that aggregate variables are observed to comove negatively.
    Keywords: Comovements, Anticipation, News, Real Business Cycles, Equilibrium Dynamics
    JEL: E10 E30 E37
    Date: 2009–11
  2. By: Elie Appelbaum (York University, Toronto)
    Abstract: This paper shows that the Rubinstein alternating offers model can be modified to provide a Pareto superior outcome in the context of the right-to-manage union-firm bargaining. Two examples of bargaining protocols that yield a superior outcome are provided. In the first example, the union and the firm engage in a game in which the order of play is determined as part of the bargaining. We show that the game has a unique subgame perfect equilibrium in which the firm always moves first in the wage bargaining game and the equilibrium wage is, therefore, unique. In the second example we examine a two-part-tariff alternating offers bargaining protocol, where the firm and the union bargain over the wage and transfer payments. We show that this bargaining protocol has a Pareto efficient, unique subgame perfect equilibrium. Thus, although the parties do not bargain over the level of employment, the outcome under this protocol is, nevertheless, “socially” optimal.
    Keywords: Union Wage premium, Efficient Bargaining, Right to Manage
    JEL: J51 J52 J53 C70
    Date: 2009–02
  3. By: Edmans, Alex; Gabaix, Xavier
    Abstract: This paper identifies a class of multiperiod agency problems in which the optimal contract is tractable (attainable in closed form). By modeling the noise before the action in each period, we force the contract to provide sufficient incentives state-by-state, rather than merely on average. This tightly constrains the set of admissible contracts and allows for a simple solution to the contracting problem. Our results continue to hold in continuous time, where noise and actions are simultaneous. We thus extend the tractable contracts of Holmstrom and Milgrom (1987) to settings that do not require exponential utility, a pecuniary cost of effort, Gaussian noise or continuous time. The contract's functional form is independent of the noise distribution. Moreover, if the cost of effort is pecuniary (multiplicative), the contract is linear (log-linear) in output and its slope is independent of the noise distribution, utility function and reservation utility. In a two-stage contracting game, the optimal target action depends on the costs and benefits of the environment, but is independent of the noise realization.
    Keywords: closed forms; contract theory; dispersive order; executive compensation; incentives; principal-agent problem; subderivative
    JEL: D2 D3 G34 J3
    Date: 2009–11
  4. By: Polder, Michael; Veldhuizen, Erik; Bergen, Dirk van den; Pijll, Eugène van der
    Abstract: This paper investigates competition in the Dutch manufacturing sector. We look at various indicators that have been used throughout the literature and relate these to productivity growth. Moreover, where possible, the indicators and productivity growth are calculated at both the firm and industry level. This enables us to investigate differences in competition and in its relation with productivity for both aggregation levels. Our results indicate that contemporaneous competition is associated with lower productivity, while lagged competition is positively associated with productivity. This finding is consistent between micro and macro, and robust over the various indicators and industries. The results are consistent with the idea that firms first experience negative effects of changes in competition and need time to adjust, while in the period after adjustment productivity rises again.
    Keywords: competition; productivity change; growth accounts; Production Statistics; micro-macro
    JEL: O47 D24 D4
    Date: 2009
  5. By: Irarrazabal, Alfonso; Moxnes, Andreas; Ulltveit-Moe, Karen-Helene
    Abstract: We expect trade liberalization to give rise to aggregate productivity gains, as the least efficient firms are forced out, and labor is reallocated towards the best performing firms. But the positive intra-industry reallocation effects rely on the stark assumption that exporters’ superior performance is due to intrinsic firm efficiency. We investigate the importance of intrinsic firm efficiency relative to input quality as sources of exporters’ productivity premium, employing a matched employer-employee data set for Norwegian manufacturing. Augmented measures of total factor productivity which take worker characteristics into account, indicate that up to 67 percent of the exporter premium reflects differences in workforce rather than true efficiency. Simulating the labor dynamics proceeding firm exits, we illustrate that the benign impact on aggregate productivity from firm exits may be reduced because of worker reallocation.
    Keywords: exporters; firm heterogeneity; labor reallocation; productivity measurement; worker heterogeneity
    JEL: D24 F12 F14 F16
    Date: 2009–11
  6. By: Susanto Basu (Boston College; NBER); Luigi Pascali (Boston College); Fabio Schiantarelli (Boston College; IZA); Luis Serven (World Bank)
    Abstract: We prove that the change in welfare of a representative consumer is summarized by the current and expected future values of the standard Solow productivity residual. The equivalence holds if the representative household maximizes utility while taking prices parametrically. This result justifies TFP as the right summary measure of welfare (even in situations where it does not properly measure technology) and makes it possible to calculate the contributions of disaggregated units (industries or firms) to aggregate welfare using readily available TFP data. Based on this finding, we compute firm and industry contributions to welfare for a set of European OECD countries (Belgium, France, Great Britain, Italy, Spain), using industry-level (EU-KLEMS) and firm-level (Amadeus) data. After adding further assumptions about technology and market structure (firms minimize costs and face common factor prices), we show that welfare change can be decomposed into three components that reject respectively technical change, aggregate distortions and allocative efficiency. Then, using theoretically appropriate firm-level data, we assess the importance of each of these components as sources of welfare improvement in the same set of European countries.
    Keywords: Productivity, Welfare, Reallocation, Technology, TFP
    JEL: D24 D90 E20 O47
    Date: 2009–11–23
  7. By: Robert M. Feinberg
    Abstract: In our increasingly globalized economy, the growth and profit prospects of domestic firms, especially small firms, seem clearly impacted by competitive pressures from foreign firms. This article analyzes annual data for 1989-1998 for 140 3-digit SIC manufacturing industries and for 1998-2004 for 86 4-digit NAICS industries on establishment -- plant-level -- births by small firms in several size categories. The major finding is that international pressures, in the form of import share weighted exchange rate appreciation, seem to lead to reduced rates of smallest-firm entry in manufacturing, though the magnitudes of these effects are smaller than sometimes discussed (and there is the suggestion that dollar appreciation may actually benefit small firm entry through access to cheaper inputs where the final product import threat is weak).
    Keywords: small firms, entry, foreign competition, exchange rates
    Date: 2009–03
  8. By: Beker, Pablo (University of Warwick); Subir Chattopadhyay (University of York)
    Abstract: We introduce a methodology for analysing infinite horizon economies with two agents, one good, and incomplete markets. We provide an example in which an agent’s equilibrium consumption is zero eventually with probability one even if she has correct beliefs and is marginally more patient. We then prove the following general result: if markets are e?ectively incomplete forever then on any equilibrium path on which some agent’s consumption is bounded away from zero eventually, the other agent’s consumption is zero eventually–so either some agent vanishes, in that she consumes zero eventually, or the consumption of both agents is arbitrarily close to zero infinitely often. Later we show that (a) for most economies in which individual endowments are finite state time homogeneous Markov processes, the consumption of an agent who has a uniformly positive endowment cannot converge to zero and (b) the possibility that an agent vanishes is a robust outcome since for a wide class of economies with incomplete markets, there are equilibria in which an agent’s consumption is zero eventually with probability one even though she has correct beliefs as in the example. In sharp contrast to the results in the case studied by Sandroni (2000) and Blume and Easley (2006) where markets are complete, our results show that when markets are incomplete not only can the more patient agent (or the one with more accurate beliefs) be eliminated but there are situations in which neither agent is eliminated. JEL Codes: D52 ; D61
    Date: 2009
  9. By: Olaf Posch (Aarhus University, School of Economics and Management and CREATES)
    Abstract: This paper shows that non-linearities can generate time-varying and asymmetric risk premia over the business cycle. These (empirical) key features become relevant and asset market implications improve substantially when we allow for non-normalities in the form of rare disasters. We employ explicit solutions of dynamic stochastic general equilibrium models, including a novel solution with endogenous labor supply, to obtain closed-form expressions for the risk premium in production economies. We find that the curvature of the policy functions affects the risk premium through controlling the individual's effective risk aversion.
    Keywords: Risk premium, Continuous-time DSGE, Optimal stochastic control
    JEL: E21 G11 O41
    Date: 2009–11–01
  10. By: Nicolas Petrosky-Nadeau
    Abstract: The propagation properties of the standard search and matching model of equilibrium unemployment are significantly altered when vacancy costs require some external financing on frictional credit markets. The latter induce variation in the shadow cost of external funds of the cycle that greatly increase the elasticity of vacancy postings to productivity through two distinct channels: (i) a cost channel - a lowered shadow cost during an upturn as credit constraints are relaxed increases the incentive to post vacancies; (ii) a wage channel - the improved bargaining position of firms afforded by the lowered cost of vacancies limits of the upward pressure of market tightness on wages. As a result, the model can match the observed volatility of unemployment, vacancies and labor market tightness. Moreover, the progressive easing of financing constraints to innovations generates persistence in the response of market tightness and vacancies, a robust feature of the data and shortcoming of the standard model.
    Date: 2009–11
  11. By: Yasuo Kawawaki (Ph.D., Osaka School of International Public Policy, Osaka University)
    Abstract: Housing wealth and financial wealth are the most important asset categories in households' portfolios, and they are the joint outcomes of one decision process by households. This paper investigates how the investment decision for housing and financial wealth of households are interrelated with the model based on Hochguertel and van Soest (2001) using the cross-sectional data drawn from the survey on Japanese metropolitan households. I use a bivariate regression model for housing demand and financial demand assuming lower limitation constraints on housing demand, in which the financial demand is switched to the different function according to the housing demand constraint is binding or not (Type 4 Tobit Model). It is found that the effect of the increase in renters' income or age on their financial demand is not clear implying that part of their financial demand spills over to housing demand, and it is also found that young homeowners use part of their home mortgage debts to hold financial assets (Excess Mortgage Demand) in the recent low interest rate condition.
    Keywords: Housing Wealth, Financial Wealth, Switching Regression Model, Type4 Tobit, Excess Mortgage Demand
    JEL: C31 C34 D31
    Date: 2009–11
  12. By: Acharya, Viral (London Business School); Song Shin, Hyun (Princeton University Bendheim Center for Finance); Yorulmazer, Tanju (Federal Reserve Bank of New York)
    Abstract: Banks’ liquidity is a crucial determinant of the adversity of banking crises. In this paper, we consider the effect of fire sales and entry during crises on banks’ ex-ante choice of liquid asset holdings. We consider a setting with limited pledgeability of risky cash flows relative to safe ones and a differential expertise between banks and outsiders in employing banking assets. When a large number of banks fail, market for assets clears only at fire-sale prices and outsiders enter the market if prices fall sufficiently low. In such states, there is a private benefit of liquid holdings to banks from purchasing assets. There is also a social benefit since greater banking system liquidity reduces inefficiency from liquidation of assets to outsiders. When pledgeability of risky cash flows is high, for instance, in countries with well-developed capital markets, banks hold less liquidity than is socially optimal due to risk-shifting incentives; otherwise, banks may hold even more liquidity than is socially optimal to capitalise on fire sales. However, if there is a systemic cost associated with crises, for example, in the form of fiscal costs associated with provision of deposit insurance, then socially optimal liquidity may always be higher than the privately optimal one, and, in turn, regulation in the form of prudent liquidity requirements may be desirable. We provide some international evidence on banks’ liquid holdings that is consistent with model’s predictions.
    Keywords: Crises; systemic risk; distress; limited pledgeability; lender of last resort
    JEL: D61 E58 G21 G28 G32
    Date: 2009–11–27
  13. By: Caruntu, Constantin; Lapadusi, Mihaela Loredana
    Abstract: The mechanism operator of total actual capital on profit afferent turnover in the synthesizer manner is an important tool in assessing the economic and financial performance of the company both internally and in the diagnostic tests performed outside. Addressed the overall level of business, real capital - fixed and circulating - appears as part of operating capital; with all other forms of total capital operated in the frame of business activity, actual capital is involved in a specific circuit, arising from the operation of producer agents in a market economic environment. The transformation of the company liquid capital in productive real capital takes place in conditions in which the firm is presented on the capital goods market as a buyer and actually proceed to the purchase of goods-capital needed for production. Simultaneously, the company is presented as a buyer and the labor market, drawing work resources required.
    Keywords: total capital; fixed capital; circulanting capital; profit; turnover;rentability;
    JEL: D61
    Date: 2009
  14. By: Chahine, Salim; Goergen, Marc (Cardiff Business School)
    Abstract: This paper examines the conditions under which CEOs are able to affect the timing and the price of the stock options they are granted at the time of their firm.s IPO. Contrary to Lowry and Murphy (2007) who do not find a relationship between IPO grants and IPO underpricing, this paper finds such a relationship when board independence, the power of the CEO and venture-capital (VC) backing are taken into account. The results suggest that powerful CEOs and VCs are able to reap substantial gains from IPO options to the detriment of the shareholders.
    Keywords: stock options; board independence; venture capital involvement; CEO power; initial public offerings; underpricing; conflicts of interest; corporate governance
    JEL: G24 G30 J33
    Date: 2009–11
  15. By: Sébastien Laurent; Jeroen Rombouts; Francesco Violente
    Abstract: A large number of parameterizations have been proposed to model conditional variance dynamics in a multivariate framework. However, little is known about the ranking of multivariate volatility models in terms of their forecasting ability. The ranking of multivariate volatility models is inherently problematic because it requires the use of a proxy for the unobservable volatility matrix and this substitution may severely affect the ranking. We address this issue by investigating the properties of the ranking with respect to alternative statistical loss functions used to evaluate model performances. We provide conditions on the functional form of the loss function that ensure the proxy-based ranking to be consistent for the true one - i.e., the ranking that would be obtained if the true variance matrix was observable. We identify a large set of loss functions that yield a consistent ranking. In a simulation study, we sample data from a continuous time multivariate diffusion process and compare the ordering delivered by both consistent and inconsistent loss functions. We further discuss the sensitivity of the ranking to the quality of the proxy and the degree of similarity between models. An application to three foreign exchange rates, where we compare the forecasting performance of 16 multivariate GARCH specifications, is provided. <P>Un grand nombre de méthodes de paramétrage ont été proposées dans le but de modéliser la dynamique de la variance conditionnelle dans un cadre multivarié. Toutefois, on connaît peu de choses sur le classement des modèles de volatilité multivariés, du point de vue de leur capacité à permettre de faire des prédictions. Le classement des modèles de volatilité multivariés est forcément problématique du fait qu’il requiert l’utilisation d’une valeur substitutive pour la matrice de la volatilité non observable et cette substitution peut influencer sérieusement le classement. Nous abordons ce problème en examinant les propriétés du classement en relation avec les fonctions de perte statistiques alternatives utilisées pour évaluer la performance des modèles. Nous présentons des conditions liées à la forme fonctionnelle de la fonction de perte qui garantissent que le classement fondé sur une valeur de substitution est constant par rapport au classement réel, c’est-à-dire à celui qui serait obtenu si la matrice de variance réelle était observable. Nous établissons un vaste ensemble de fonctions de perte qui produisent un classement constant. Dans le cadre d’une étude par simulation, nous fournissons un échantillon de données à partir d’un processus de diffusion multivarié en temps continu et comparons l’ordre généré par les fonctions de perte constantes et inconstantes. Nous approfondissons la question de la sensibilité du classement à la qualité de la substitution et le degré de ressemblance entre les modèles. Une application à trois taux de change est proposée et, dans ce contexte, nous comparons l’efficacité de prédiction de 16 paramètres du modèle GARCH multivarié (approche d’hétéroscédasticité conditionnelle autorégressive généralisée).
    Keywords: Volatility, multivariate GARCH, matrix norm, loss function, model confidence set, Volatilité, modèle GARCH multivarié, norme matricielle, fonction de perte, ensemble de modèles de confiance.
    Date: 2009–11–01
  16. By: Cornelli, Francesca; Kominek, Zbigniew; Ljungqvist, Alexander P.
    Abstract: We test under what circumstances boards discipline managers and whether such interventions improve performance. We exploit exogenous variation due to the staggered adoption of corporate governance laws in formerly Communist countries coupled with detailed ‘hard’ information about the board’s performance expectations and ‘soft’ information about board and CEO actions and the board’s beliefs about CEO competence in 473 mostly private-sector companies backed by private equity funds between 1993 and 2008. We find that CEOs are fired when the company underperforms relative to the board’s expectations, suggesting that boards use performance to update their beliefs. CEOs are especially likely to be fired when evidence has mounted that they are incompetent and when board power has increased following corporate governance reforms. In contrast, CEOs are not fired when performance deteriorates due to factors deemed explicitly to be beyond their control, nor are they fired for making 'honest mistakes.' Following forced CEO turnover, companies see performance improvements and their investors are considerably more likely to eventually sell them at a profit.
    Keywords: boards of directors; CEO turnover; Corporate governance; large shareholders; legal reforms; private equity; transition economies
    JEL: G24 G32 G34 K22 O16 P21
    Date: 2009–11
  17. By: Gavin C Reid; Zhibin Xu
    Abstract: This paper reports on one of the first empirical attempts to investigate small firm growth and survival, and their determinants, in the Peoples’ Republic of China. The work is based on field work evidence gathered from a sample of 83 Chinese private firms (mainly SMEs) collected initially by face-to-face interviews, and subsequently by follow-up telephone interviews a year later. We extend the models of Gibrat (1931) and Jovanovic (1982), which traditionally focus on size and age alone (e.g. Brock and Evans, 1986), to a ‘comprehensive’ growth model with two types of additional explanatory variables: firm-specific (e.g. business planning); and environmental (e.g. choice of location). We estimate two econometric models: a ‘basic’ age-size-growth model; and a ‘comprehensive’ growth model, using Heckman’s two-step regression procedure. Estimation is by log-linear regression on cross-section data, with corrections for sample selection bias and heteroskedasticity. Our results refute a pure Gibrat model (but support a more general variant) and support the learning model, as regards the consequences of size and age for growth; and our extension to a comprehensive model highlights the importance of location choice and customer orientation for the growth of Chinese private firms. In the latter model, growth is explained by variables like planning, R&D orientation, market competition, elasticity of demand etc. as well as by control variables. Our work on small firm growth achieves two things. First, it upholds the validity of ‘basic’ size-age-growth models, and successfully applies them to the Chinese economy. Second, it extends the compass of such models to a ‘comprehensive’ growth model incorporating firm-specific and environmental variables.
    Keywords: Chinese private firms, models of small firm growth, choice of location, customer orientation
    JEL: D21 M13 L25 L26
    Date: 2009–11
  18. By: Dewachter, Hans; Iania, Leonardo
    Abstract: This paper extends the benchmark Macro-Finance model by introducing, next to the standard macroeconomic factors, additional liquidity-related and return forecasting factors. Liquidity factors are obtained from a decomposition of the TED spread while the return-forecasting (risk premium) factor is extracted by imposing a single factor structure on excess holding returns. The model is estimated on US data using MCMC techniques. Two findings stand out. First, the model outperforms Macro-Finance benchmark models in fitting the yield curve. Second, financial shocks, either in the form of liquidity or risk premium shocks, have a statistically and economically significant impact on the yield curve.
    Keywords: Term structure, Macro-finance, TED spread, Interbank lending rates
    JEL: E43 G12 E44 C11
    Date: 2009–10–02
  19. By: Simon Gaechter (Centre for Decision Research and Experimental Economics (CeDEx), University of Nottingham); Daniele Nosenzo (Centre for Decision Research and Experimental Economics (CeDEx), University of Nottingham); Elke Renner (Centre for Decision Research and Experimental Economics (CeDEx), University of Nottingham); Martin Sefton (Centre for Decision Research and Experimental Economics (CeDEx), University of Nottingham)
    Abstract: We examine the characteristics of effective leaders in a simple leader-follower voluntary contributions game. We focus on two factors: the individual’s cooperativeness and the individual’s beliefs about the cooperativeness of others. We find that groups perform best when led by those who are cooperatively inclined. Partly this reflects a false consensus effect: cooperative leaders are more optimistic than non-cooperators about the cooperativeness of followers. However, cooperative leaders contribute more than non-cooperative leaders even after controlling for optimism. We conclude that differing leader contributions by differing types of leader in large part reflects social motivations.
    JEL: A13 C92
    Date: 2009–10
  20. By: Ralph M. Sonenshine
    Abstract: This study examines the pattern of abnormal returns for merging companies and rivals to determine investor expectations regarding the impact of horizontal mergers challenged by the government. Prior studies have indicated that the government may have challenged efficiency-enhancing mergers as evidenced by the pattern of abnormal returns to rivals during merger events. This study examines those patterns using challenged mergers from 1997 to 2007, and it adds to the literature by assessing the effect that R&D intensity and change in HHI have on the returns to rivals and merging firms. The paper finds that the pattern of abnormal returns is a result of the different effects that antitrust complaints and merger outcomes have on rivals based on R&D intensity and change in industry concentration. This finding suggests that the government may have been properly vigilant in challenging mergers over the past 10 years in basic industries that have high levels of market concentration. However, it also may have allowed collusive mergers to proceed in R and D intensive industries.
    Keywords: mergers, Research and Development, Strategic Protection, market concentration, event study
    Date: 2009–08
  21. By: Jesper Rangvid (Copenhagen Business School); Maik Schmeling (Department of Economics, Leibniz University Hannover); Andreas Schrimpf (School of Economics and Management and CREATES)
    Abstract: We estimate long-run consumption-based asset pricing models using a comprehensive set of international test assets, including broad equity market portfolios, international value/growth portfolios, and international bond portfolios. We find that differencesin returns across assets within a country are sometimes (and most prominently for the U.S.) better captured by the assets' exposure to long-run consumption risk as opposed to their exposure to one-period changes in consumption (the canonical consumption CAPM). Across countries, however, exposure to long-run consumption risk does not provide a better fit than the canonical consumption CAPM. Thus, when characterizing the cross-country distribution of returns, long-run consumption risk does not seem to play any particular role, even if long-run risk is important for explaining the cross section of expected returns in the U.S. Furthermore, we show that consumption growth is more predictable over short to medium-run horizons than over longer horizons and that empirical evidence of a de- clining risk aversion parameter estimate in long-run risk models has to be interpreted with care.
    Keywords: International Asset Pricing, Long-run Consumption Risk
    JEL: F30 G12 G15
    Date: 2009–11–01

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