Asset Pricing with Countercyclical Household Consumption Risk
NBER Working Paper No. 20110
We present evidence that shocks to household consumption growth are negatively skewed, persistent, countercyclical, and play a major role in driving asset prices. We construct a parsimonious model where heterogeneous households have recursive preferences and a single state variable drives the conditional cross-sectional moments of household consumption growth. The estimated model fits well the cross-sectional moments of household consumption growth and the unconditional moments of the risk-free rate, equity premium, market price-dividend ratio, and aggregate dividend and consumption growth. Consistent with empirical evidence, the model-implied risk-free rate and price-dividend ratio are pro-cyclical while the market return has countercyclical mean and variance.
You may purchase this paper on-line in .pdf format from SSRN.com ($5) for electronic delivery.
This paper was revised on November 5, 2014
Document Object Identifier (DOI): 10.3386/w20110
Users who downloaded this paper also downloaded these: