NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Asset Return Dynamics under Bad Environment Good Environment Fundamentals

Geert Bekaert, Eric Engstrom

NBER Working Paper No. 15222
Issued in August 2009
NBER Program(s):   AP

We introduce a "bad environment-good environment" technology for consumption growth in a consumption- based asset pricing model. Using the preference structure from Campbell and Cochrane (1999), the model generates realistic time-varying volatility, skewness and kurtosis in fundamentals while still permitting closed-form solutions for asset prices. The model not only fits standard salient asset prices features including means and volatilities for equity returns and risk free rates, but also generates a realistic variance premium and option prices.

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Document Object Identifier (DOI): 10.3386/w15222

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