Habit , Long Run Risks , Prospect ?

We use Bayesian statistical methods to compare the habit persistence asset pricing model of Campbell and Cochrane, the long run risks model of Bansal and Yaron, and the prospect theory model of Barberis, Huang, and Santos. We undertake two types of comparisons, relative and absolute, over two sample periods, 1930–2008 and 1950–2008, using two series, univariate U.S. stock returns and bivariate U.S. consumption growth and stock returns. The prior for each model is that the real interest rate be within 1% of 0.896 with probability 0.95 together with a preference for model parameters that are near their published values. For the univariate series and for both sample periods, the models perform about the same in the relative comparison and fit the data reasonably well in the absolute assessment. For the bivariate series, in the relative comparison the long run risks model overwhelmingly dominates over the 1930–2008 period, while the habit persistence model overwhelmingly dominates over the 1950–2008 period; in the absolute assessment, the habit model fails definitively in the 1930–2008 period and the prospect theory model fails definitively in the 1950–2008 period. Out-ofsample, the models show interesting differences in their forecasts over the 2009–2013 horizon. In-sample, they differ mainly in their ability to track the conditional volatility of consumption growth and the conditional correlation between consumption growth and stock returns.