A novel methodology in testing the long-run risks model of Bansal and Yaron (2004) is presented based on the observation that, under the null, the potentially latent state variables, "long-run risk" and the conditional variance of its innovation, are known a¢ ne functions of the observable...

A novel methodology in testing the long-run risks model of Bansal and Yaron (2004) is presented based on the observation that, under the null, the potentially latent state variables, "long-run risk" and the conditional variance of its innovation, are known a¢ ne functions of the observable...

We study a broad class of asset pricing models in which the stochastic discount factor (SDF) can be factorized into an observable component (e.g., a parametric function of consumption) and a potentially unobservable one (e.g., habit level or the return on total wealth). Exploiting this...