NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Asset Pricing with Countercyclical Household Consumption Risk

George M. Constantinides, Anisha Ghosh

NBER Working Paper No. 20110
Issued in May 2014
NBER Program(s):   AP

This paper presents evidence that shocks to household consumption growth are negatively skewed, persistent, and countercyclical and play a major role in driving asset prices. We construct a parsimonious model in which heterogeneous households have recursive preferences and a single state variable drives the conditional cross-sectional moments of household consumption growth. We demonstrate, under certain conditions, the existence of equilibrium in such a heterogeneous-household economy. The estimated model provides a good fit for the moments of the cross-sectional distribution 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. The explanatory power of the model does not derive from possible predictability of aggregate dividend and consumption growth as these are intentionally modeled as i.i.d. processes. Consistent with empirical evidence, the model implies that the risk free rate and price-dividend ratio are pro-cyclical while the expected market return and the variance of the market return and risk free rate are countercyclical. Household consumption risk also explains the cross-section of excess returns.

You may purchase this paper on-line in .pdf format from SSRN.com ($5) for electronic delivery.

Information about Free Papers

You should expect a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.

E-mail:

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w20110

Users who downloaded this paper also downloaded these:
Wu and Xia w20117 Measuring the Macroeconomic Impact of Monetary Policy at the Zero Lower Bound
McMillan and Harttgen w20077 What is driving the ‘African Growth Miracle’?
Clark, Joubert, and Maurel w20167 The Career Prospects of Overeducated Americans
Kaplan, Violante, and Weidner w20073 The Wealthy Hand-to-Mouth
Koijen and Yogo w19568 Shadow Insurance
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us