Latent Utility Shocks in a Structural Empirical Asset Pricing Model

Bent Jesper Christensen, Peter Raahauge

Research output: Working paperResearch

Abstract

We consider a random utility extension of the fundamental Lucas (1978) equilibriumasset pricing model. The resulting structural model leads naturally to a likelihoodfunction. We estimate the model using U.S. asset market data from 1871 to2000, using both dividends and earnings as state variables. We find that current dividendsdo not forecast future utility shocks, whereas current utility shocks do forecastfuture dividends. The estimated structural model produces a sequence of predictedutility shocks which provide better forecasts of future long-horizon stock market returnsthan the classical dividend-price ratio.KEYWORDS: Randomutility, asset pricing, maximumlikelihood, structuralmodel,return predictability
Original languageEnglish
Place of PublicationKøbenhavn
PublisherCopenhagen Business School [wp]
Number of pages36
ISBN (Print)8790705831
Publication statusPublished - 2004

Cite this

Christensen, B. J., & Raahauge, P. (2004). Latent Utility Shocks in a Structural Empirical Asset Pricing Model. København: Copenhagen Business School [wp].
Christensen, Bent Jesper ; Raahauge, Peter. / Latent Utility Shocks in a Structural Empirical Asset Pricing Model. København : Copenhagen Business School [wp], 2004.
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Christensen, BJ & Raahauge, P 2004 'Latent Utility Shocks in a Structural Empirical Asset Pricing Model' Copenhagen Business School [wp], København.

Latent Utility Shocks in a Structural Empirical Asset Pricing Model. / Christensen, Bent Jesper; Raahauge, Peter.

København : Copenhagen Business School [wp], 2004.

Research output: Working paperResearch

TY - UNPB

T1 - Latent Utility Shocks in a Structural Empirical Asset Pricing Model

AU - Christensen, Bent Jesper

AU - Raahauge, Peter

PY - 2004

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N2 - We consider a random utility extension of the fundamental Lucas (1978) equilibriumasset pricing model. The resulting structural model leads naturally to a likelihoodfunction. We estimate the model using U.S. asset market data from 1871 to2000, using both dividends and earnings as state variables. We find that current dividendsdo not forecast future utility shocks, whereas current utility shocks do forecastfuture dividends. The estimated structural model produces a sequence of predictedutility shocks which provide better forecasts of future long-horizon stock market returnsthan the classical dividend-price ratio.KEYWORDS: Randomutility, asset pricing, maximumlikelihood, structuralmodel,return predictability

AB - We consider a random utility extension of the fundamental Lucas (1978) equilibriumasset pricing model. The resulting structural model leads naturally to a likelihoodfunction. We estimate the model using U.S. asset market data from 1871 to2000, using both dividends and earnings as state variables. We find that current dividendsdo not forecast future utility shocks, whereas current utility shocks do forecastfuture dividends. The estimated structural model produces a sequence of predictedutility shocks which provide better forecasts of future long-horizon stock market returnsthan the classical dividend-price ratio.KEYWORDS: Randomutility, asset pricing, maximumlikelihood, structuralmodel,return predictability

KW - Aktieinvestering

KW - USA

KW - Aktiemarkeder

KW - Dividende

KW - Asset pricing

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Christensen BJ, Raahauge P. Latent Utility Shocks in a Structural Empirical Asset Pricing Model. København: Copenhagen Business School [wp]. 2004.