Asset Pricing with Countercyclical Household Consumption Risk / George M. Constantinides, Anisha Ghosh.

Format:

Book

Author/Creator:

Constantinides, George M.

Contributor:

National Bureau of Economic Research.

Ghosh, Anisha.

Series:

Working Paper Series (National Bureau of Economic Research) no. w20110.

NBER working paper series no. w20110

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2014.

Summary:

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.

Notes:

Print version record

May 2014.