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

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.

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This paper was revised on November 5, 2014

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w20110

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