Working Paper Series, Department of Finance, Copenhagen Business School
Bent Jesper Christensen and Peter Raahauge
Latent Utility Shocks in a Structural Empirical Asset Pricing Model
Abstract: We consider a random utility extension of the fundamental
Lucas (1978) equilibrium asset pricing model. The resulting structural
model leads naturally to a likelihood function. We estimate the model using
U.S. asset market data from 1871 to 2000, using both dividends and earnings
as state variables. We find that current dividends do not forecast future
utility shocks, whereas current utility shocks do forecast future
dividends. The estimated structural model produces a sequence of predicted
utility shocks which provide better forecasts of future long-horizon stock
market returns than the classical dividend-price ratio.
Keywords: Randomutility; asset pricing; maximumlikelihood; structuralmodel; return predictability; (follow links to similar papers)
JEL-Codes: G00; (follow links to similar papers)
36 pages, December 14, 2004
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