Long-Run Risk: Is It There?

Abstract

This paper documents the existence of a persistent component in consumption growth. We take a novel approach using news coverage to capture investor concern about economic growth prospects. We provide evidence that consumption growth is highly predictable over long horizons—our measure explains between 23% and 38% of cumulative future consumption growth at the five-year horizon and beyond. Furthermore, we show a strong connection between this predictability and asset prices. Innovations to our measure price 51 standard portfolios in the cross section and our one-factor model outperforms many benchmark macro- and return-based multifactor models.