Asset Return Dynamics under Bad Environment Good Environment Fundamentals

Geert Bekaert () and Eric Engstrom

No 15222, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We introduce a "bad environment-good environment" technology for consumption growth in a consumption- based asset pricing model. Using the preference structure from Campbell and Cochrane (1999), the model generates realistic time-varying volatility, skewness and kurtosis in fundamentals while still permitting closed-form solutions for asset prices. The model not only fits standard salient asset prices features including means and volatilities for equity returns and risk free rates, but also generates a realistic variance premium and option prices.

JEL-codes: G10 G12 G13 G14 (search for similar items in EconPapers)
Date: 2009-08
Note: AP

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