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Abstract:
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We consider a random utility extension of the fundamental Lucas (1978) equilibrium
asset pricing model. The resulting structural model leads naturally to a likelihood
function. We estimate the model using U.S. asset market data from 1871 to
2000, using both dividends and earnings as state variables. We find that current dividends
do not forecast future utility shocks, whereas current utility shocks do forecast
future dividends. The estimated structural model produces a sequence of predicted
utility shocks which provide better forecasts of future long-horizon stock market returns
than the classical dividend-price ratio.
KEYWORDS: Randomutility, asset pricing, maximumlikelihood, structuralmodel,
return predictability |
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