Open AccessPosted Content
By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior
Reads0
Chats0
TLDR
In this article, a consumption-based model was proposed to explain the procyclical variation of stock prices, the long-horizon predictability of excess stock returns, and the countercyclical variations of stock market volatility.Abstract:
We present a consumption-based model that explains the procyclical variation of stock prices, the long-horizon predictability of excess stock returns, and the countercyclical variation of stock market volatility. Our model has an i.i.d. consumption growth driving process, and adds a slow-moving external habit to the standard power utility function. The latter feature produces cyclical variation in risk aversion, and hence in the prices of risky assets. Our model also predicts many of the difficulties that beset the standard power utility model, including Euler equation rejections, no correlation between mean consumption growth and interest rates, very high estimates of risk aversion, and pricing errors that are larger than those of the static CAPM. Our model captures much of the history of stock prices, given only consumption data. Since our model captures the equity premium, it implies that fluctuations have important welfare costs. Unlike many habit-persistence models, our model does not necessarily produce cyclical variation in the risk free interest rate, nor does it produce an extremely skewed distribution or negative realizations of the marginal rate of substitution.read more
Citations
More filters
Journal ArticleDOI
The Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk
TL;DR: The U.S. consumption growth beta of an investment strategy that goes long in high interest rate currencies and short in low interest rate currency is large and significant as discussed by the authors, even after accounting for the sampling uncertainty introduced by the estimation of the consumption betas.
Journal ArticleDOI
Stock Return Predictability: Is it There?
Geert Bekaert,Andrew Ang +1 more
TL;DR: In this article, the authors examined whether stock returns in France, Germany, the UK and the US are predictable by three instruments: the dividend yield, the earnings yield and the short rate.
Journal ArticleDOI
A Model of Capital and Crises
Zhiguo He,Arvind Krishnamurthy +1 more
TL;DR: The authors developed a model in which the capital of the intermediary sector plays a critical role in determining asset prices, and the role for intermediation is derived endogenously based on optimal contracting considerations.
Posted Content
Market Conditions, Default Risk and Credit Spreads
Dragon Yongjun Tang,Hong Yan +1 more
TL;DR: The authors empirically examined the impact of the interaction between market and default risk on corporate credit spreads using credit default swap (CDS) spreads, and found that average credit spreads decrease in GDP growth rate, but increase in nominal GDP growth volatility and jump risk in the equity market.
Journal ArticleDOI
Uninsured Idiosyncratic Investment Risk and Aggregate Saving
Abstract: This paper augments the neoclassical growth model to study the macroeconomic effects of idiosyncratic investment risk. The general equilibrium is solved in closed form under standard assumptions for preferences and technologies. Relative to complete markets, the steady state is characterized by both a lower interest rate and a lower capital stock when the elasticity of intertemporal substitution is sufficiently high. For plausible calibrations of the model, the reduction in aggregate savings and income is quantitatively significant. Finally, cyclical variation in private investment risks is shown to amplify the transitional dynamics.