Long Run Risk: Is It There?

This paper provides direct evidence in support of the Long Run Risk model mechanism. We construct a measure to capture the persistent component of consumption growth using investor expectations of growth prospects contained in the news. Consistent with the predictions of the Long Run Risk model, this measure explains up to 25 percent of cumulative future consumption growth over long horizons. Furthermore, innovations to this measure price 52 standard test portfolios in the cross-section. The consumption growth predictability result is robust to the inclusion of existing short-term predictors, and the pricing power of the measure outperforms benchmark multi-factor models. JEL: E00, G12