| The construction and extension of C-CAPM model is one of the most important theoretical achivements in the field of asset pricing during the last3decades. Combining investment decision with consumption behavior under the framework of general equilibrium, this model helps reinforce the economic foundation for asset pricing theories, while the problems for applying this model in both theoretical and empirical researches make the model adjustment and correction a crucial battlefield in the area of asset pricing study. Bansal and Yaron(2004) creatively proposed the Long-run Risk Model. In their studies, there exists a certain factor that’s tiny, highly persistend and predictable. The shock towards the expectation of future economic growth will have a great and continuous impact on asset price in both current and future periods, for the consumers will try to resolve the future uncertainty in current period under the nonseparable Epstein-Zin preference. This theory shares the feature of good acceptability and inspiration, making it more and more popular recent years.This paper extends the long-run risk model based on durable consumption by adding a cointegration equation for durable commodities and dividends, and discussing whether the extended model can offer a better explanation for certain phenomena in capital markets. In the empirical test, we use both stationary and cointegrated LRR model in durable consumption to forecast the in-sample excess return of25Fama-French investment portfolio. The empirical results show that, the cointegrated LRR model in durable consumption has a greater explanatory power for the excess return than the stationary model in both time series and cross sectional analysis. A further analysis on the contribution of pricing factors prove that in the cointegrated model, the cointegration residual makes the greatest contribution, which means that the exposure of dividends to the durable consumption long-run risk has a strong predictive effect on stock return innovation. |
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