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, Revised in November 2016
NBER Program(s):AP

We show that shocks to household consumption growth are negatively skewed, persistent, countercyclical, and drive asset prices. We construct a parsimonious model where heterogeneous households have recursive preferences. A single state variable drives the conditional cross-sectional moments of household consumption growth. The estimated model fits well the unconditional cross-sectional moments of household consumption growth and the moments of the risk-free rate, equity premium, price-dividend ratio, and aggregate dividend and consumption growth. The model-implied risk-free rate and price-dividend ratio are procyclical while the market return has countercyclical mean and variance. Finally, household consumption risk explains the cross-section of excess returns.

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Document Object Identifier (DOI): 10.3386/w20110

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