Predictability in Consumption Growth and Equity Returns: A Bayesian Investigation

Alex Paseka and George Theocharides ()

The Financial Review, 2010, vol. 45, issue 1, 167-203

Abstract: We use a Bayesian method to estimate a consumption‐based asset pricing model featuring long‐run risks. Although the model is generally consistent with consumption and dividend growth moments in annual data, the conditional mean of consumption growth (a latent process) is not persistent enough to satisfy the restriction that the price‐dividend ratio be an affine function of the latent process. The model also requires relatively high intertemporal elasticity of substitution to match the low volatility of the risk‐free return. These two restrictions lead to the equity volatility puzzle. The model accounts for only 50% of the total variation in asset returns.

Date: 2010
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://doi.org/10.1111/j.1540-6288.2009.00242.x

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:finrev:v:45:y:2010:i:1:p:167-203

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0732-8516

Access Statistics for this article

The Financial Review is currently edited by Cynthia J. Campbell and Arnold R. Cowan

More articles in The Financial Review from Eastern Finance Association Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().