Long Run Risk Model and Equity Premium Puzzle in Thailand
This paper shows that the long-run risk model of Bansal and Yaron (2004) can potentially solve the equity premium and risk-free rate puzzles in Thailand. In particular, the calibrated values of the risk aversion and the elasticity of intertemporal substitution are empirically plausible. Risk decomposition results indicate that long-run risk is the most important risk component relevant to asset prices; that is, asset prices in Thai financial markets are most sensitive to small changes in news regarding long-term expected growth rates. Volatility risk also has an impact on asset prices but its impact is just about a quarter of the impact of the long-run risk.