Long Run Risk : Is It There?

This paper documents the existence of long run risk 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 up to 24 percent of cumulative future consumption growth at the 6-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 this 1-factor model outperforms many benchmark multi-factor models