Prices, Consumption, and Dividends Over the Business Cycle: A Tale of Two Regimes

Anisha Ghosh, George M. Constantinides

NBER Working Paper No. 20678
Issued in November 2014
NBER Program(s):   AP

An economy in which investors know the true model and its parameters and filter the regime probability from aggregate consumption history has been empirically rejected. Hypothesizing that prices partly reflect investors╩╝ belief about the regime, we infer beliefs from prices. The model fits well the moments of the market return, risk free rate, and price-dividend ratio. Consistent with the data, it implies higher mean and lower volatility of consumption and dividend growth rates, lower mean and volatility of the market return and equity premium, and higher mean of the price-dividend ratio in the first regime compared with the second one. The probability of recession in a year is 62:5% (23:7%) if the probability of being in the first regime at the beginning of the year is lower (higher) than 50%. The results support the hypothesis that investors employ a broader information set than just aggregate consumption history in forming their beliefs.

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

Access to NBER Papers

You are eligible for 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.


Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w20678

Users who downloaded this paper also downloaded* these:
Kerr and Nanda w20676 Financing Innovation
Hou, Xue, and Zhang w20682 A Comparison of New Factor Models
Chabot, Ghysels, and Jagannathan w20660 Momentum Trading, Return Chasing, and Predictable Crashes
Cooper and Zhu w20684 Household Finance over the Life-Cycle: What does Education Contribute?
Orlik and Veldkamp w20445 Understanding Uncertainty Shocks and the Role of Black Swans
NBER Videos

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

Contact Us