From Which Consumption-Based Asset Pricing Models Can Investors Profit? Evidence from Model-Based Priors

Mathias S Kruttli
2020 Journal of Financial Econometrics  
This article analyzes whether consumption-based asset pricing models improve the excess returns forecasts of a hypothetical investor with access to these models from 1947 onwards. The investor imposes economic constraints derived from asset pricing models as model-based priors on predictive regression parameters through a Bayesian framework. Three models are considered: habit formation, long-run risk, and prospect theory. The model-based priors generally perform better than priors that shrink
more » ... riors that shrink the parameter estimates to the historical average model and priors that impose a positive equity premium. This analysis helps to assess the value of consumption-based asset pricing models to investors.
doi:10.1093/jjfinec/nbaa023 fatcat:lbkwwc4prvb7ffioip2wsktri4