TY  - JOUR
AU  - Bekaert,Geert
AU  - Engstrom,Eric
TI  - Asset Return Dynamics under Bad Environment Good Environment Fundamentals
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 15222
PY  - 2009
Y2  - August 2009
UR  - http://www.nber.org/papers/w15222
L1  - http://www.nber.org/papers/w15222.pdf
N1  - Author contact info:
Geert Bekaert
Graduate School of Business
Columbia University
3022 Broadway, 411 Uris Hall
New York, NY 10027
Tel: 212/854-9156
Fax: 212/662-8474
E-Mail: gb241@columbia.edu

Eric Engstrom
Board of Governors of the Federal Reserve System
Washington DC 20551
Tel: 734-763-6391
Fax: 734-764-3146
E-Mail: eric.engstrom@frb.gov
AB  - 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.
ER  -