NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Asset Prices, Consumption, and the Business Cycle

John Y. Campbell

NBER Working Paper No. 6485
Issued in March 1998
NBER Program(s):   AP   EFG

This paper reviews the behavior of financial asset prices in relation to consumption. The paper lists some important stylized facts that characterize US data, and relates them to recent developments in equilibrium asset pricing theory. Data from other countries are examined to see which features of the US experience apply more generally. The paper argues that to make sense of asset market behavior one needs a model in which the market price of risk is high, time-varying, and correlated with the state of the economy. Models that have this feature, including models with habit-formation in utility, heterogeneous investors, and irrational expectations, are discussed. The main focus is on stock returns and short-term real interest rates, but bond returns are also considered.

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Document Object Identifier (DOI): 10.3386/w6485

Published: Handbook of Macroeconomics Vol.1, Taylor, John B., and Michael Woodford,eds., Amsterdam: North Holland Press, 1999, Chapter 19, pp. 1231-1303.

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