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) 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.
Original languageEnglish
Place of PublicationFrederiksberg
PublisherInstitut for Finansiering, Copenhagen Business School
Number of pages32
ISBN (Print)8790705831
Publication statusPublished - 2004
SeriesWorking Papers / Department of Finance. Copenhagen Business School
Number2004-7
ISSN0903-0352

Keywords

  • Random utility
  • Asset pricing
  • Maximum likelihood
  • Structural model
  • Return predictability

Cite this

Christensen, B. J., & Raahauge, P. (2004). Latent Utility Shocks in a Structural Empirical Asset Pricing Model. Frederiksberg: Institut for Finansiering, Copenhagen Business School. Working Papers / Department of Finance. Copenhagen Business School, No. 2004-7
Christensen, Bent Jesper ; Raahauge, Peter. / Latent Utility Shocks in a Structural Empirical Asset Pricing Model. Frederiksberg : Institut for Finansiering, Copenhagen Business School, 2004. (Working Papers / Department of Finance. Copenhagen Business School; No. 2004-7).
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Christensen, BJ & Raahauge, P 2004 'Latent Utility Shocks in a Structural Empirical Asset Pricing Model' Institut for Finansiering, Copenhagen Business School, Frederiksberg.

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

Frederiksberg : Institut for Finansiering, Copenhagen Business School, 2004.

Research output: Working paperResearch

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KW - Return predictability

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Christensen BJ, Raahauge P. Latent Utility Shocks in a Structural Empirical Asset Pricing Model. Frederiksberg: Institut for Finansiering, Copenhagen Business School. 2004.