Asset Return Dynamics under Bad Environment Good Environment Fundamentals
NBER Working Paper No. 15222
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.
Document Object Identifier (DOI): 10.3386/w15222
Published: Geert Bekaert & Eric Engstrom, 2017. "Asset Return Dynamics under Habits and Bad Environment–Good Environment Fundamentals," Journal of Political Economy, vol 125(3), pages 713-760.
Users who downloaded this paper also downloaded* these: