Campbell and Cochrane meet Melino and Yang: reverse engineering the surplus ratio in a Mehra-Prescott economy

Jim Dolmas

No 1205, Working Papers from Federal Reserve Bank of Dallas

Abstract: The habit model of Campbell and Cochrane (1999) specifies a process for the 'surplus ratio'-the excess of consumption over habit, relative to consumption-rather than an evolution for the habit stock. It's not immediately apparent if their formulation can be accommodated within the Markov chain framework of Mehra and Prescott (1985). This note illustrates one way to create a Campbell and Cochrane-like model within the Mehra-Prescott framework. A consequence is that we can perform another sort of reverse-engineering exercize-we can calibrate the resulting model to match the stochastic discount factor derived in the Mehra-Prescott framework by Melino and Yang (2003). The Melino-Yang SDF, combined with Mehra and Prescott's consumption process, yields asset returns that exactly match the first and second moments of the data, as estimated by Mehra and Prescott.> >

Keywords: Financial markets; Asset pricing (search for similar items in EconPapers)
Pages: 11 pages
Date: 2012
New Economics Papers: this item is included in nep-dge and nep-upt
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Journal Article: Campbell and Cochrane meet Melino and Yang: Reverse engineering the surplus ratio in a Mehra–Prescott economy (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddwp:1205

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DOI: 10.24149/wp1205

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