Cash Flow and Risk Premium Dynamics in an Equilibrium Asset Pricing Model with Recursive Preferences

Abstract

Under linear approximations for asset prices and the assumption of independence between expected consumption growth and time-varying volatility, long-run risks models imply constant market prices of risks and often generate counterfactual results about asset return and cash ow predictability. We develop and estimate a nonlinear equilibrium asset pricing model with recursive preferences and a exible econometric specication