This paper investigates the applicability of Long-run Risk Model (LRR) across eleven countries - Australia, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the UK, and the USA -- using annual data spanning 1966–2011, with country-specific sample periods ranging from 28 to 79 years. The LRR is calibrated and validated through 10,000 simulations. Results show that the model successfully replicates the key moments of consumption growth, dividend growth, risk-free rates, and equity returns for most countries, with Japan as a notable exception with historically low equity premium. Much higher risk premia are observed in the Netherland and Sweden. Variance ratios confirm persistent components in growth rates. The log price-dividend ratio positively predicts future consumption and dividend growth rates and negatively predicts future growth volatility for most countries. An error-correction VAR exploiting the cointegrating relation between consumption and dividends explains substantial variation in dividend growth and returns across horizons.
Puri et al. (Wed,) studied this question.
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