Sixth Ross Prize Awarded by FARFE to Ravi Bansal and Amir Yaron for Paper on Long Run Risk


The Foundation for Advancement of Research in Financial Economics (FARFE) has awarded its sixth Stephen A. Ross Prize in Financial Economics to the paper “Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles,” written by Ravi Bansal from Duke University and Amir Yaron from the University of Pennsylvania, currently serving as the Governor of the Bank of Israel. The paper was published in the Journal of Finance in 2004. The paper and subsequent literature show the key role of changes in long-run consumption growth rates and volatility in determining asset prices.

The biennial Ross Prize is given to a paper published in the last fifteen years and was first awarded in 2008. FARFE established the $100,000 prize in honor of the late Steve Ross to recognize and encourage significant contributions to research in financial economics.

In the award-winning paper, Bansal and Yaron make a fundamental contribution to central questions in asset pricing: what drives asset price movements and what determines expected returns on financial assets. The paper demonstrates that both asset price volatility and expected returns are highly sensitive to the properties of persistent fluctuations in economic fundamentals. The authors term these fluctuations “long run risk.” This paper has broadly influenced how expected returns and risk are modeled not only in asset pricing, but also in a diverse set of areas in both finance and macroeconomics.

The model is consistent with the fact that the equity premium -- the difference between the expected return on stocks and risk-free bonds -- is around 6% in the data, thus providing a potential resolution for the “equity premium puzzle.” The sources of fluctuations in the long run growth rate of consumption include fluctuations in technological progress, but may also include crises with persistent economic effects, fluctuations in policy due to shifts in political economy, as well as climate change.

Lars Hansen, Professor of Economics at the University of Chicago and Winner of the 2013 Nobel Prize in Economics, said: “This truly innovative paper uses recursive utility in a creative way to show how investors’ concern about long-term macroeconomic uncertainty can have a big impact on even short term risk return tradeoffs observed in financial markets. It added an intriguing new perspective to asset pricing theory.”

The prize committee included: Markus Brunnermeier from Princeton University (chair); Leonid Kogan from MIT; Albert “Pete” Kyle from the University of Maryland; Rajnish Mehra from Arizona State University; David Modest from QLS Partners; S. “Vish” Viswanathan from Duke University; and Toni Whited from the University of Michigan.

Founded in 2006, FARFE, a consortium of finance academics and practitioners from around the world, is committed to supporting research in financial economics and to facilitating productive interaction between research and practice in finance. For more details about FARFE, the Ross Prize, and the award-winning paper, see