Journal of Financial Econometrics, 9(4), 2011, 589-618
Eric M. Aldrich
A. Ronald Gallant
We use recently proposed Bayesian statistical methods to compare the habit persistence asset pricing model of Campbell and Cochrane, the long-run risks model of Bansal and Yaron, and the prospect the- ory model of Barberis, Huang, and Santos. We improve these Bayesian methods so that they can accommodate highly nonlinear models such as the three aforementioned. Our substantive results can be stated suc- cinctly: If one believes that the extreme consumption fluctuations of 1930–1949 can recur, although they have not in the last sixty years even counting the current recession, then the long-run risks model is preferred. Otherwise, the habit model is preferred.
This work was supported by National Science Foundation Grant Numbers SES 0438174
Received xxxxx; revised xxxxx; accepted xxxxx