A consumption-based term structure model of bonds and equity

Masataka Suzuki

International Review of Financial Analysis, 2024, vol. 94, issue C

Abstract: In this study, I propose a consumption-based asset pricing model to capture the dynamic properties of term structures of bonds and equity. I extend the long-run risks model by introducing a mean-reversion of dividend growth and the external habit formation of a representative agent. The mean-reverting dividend growth generates a negative equity term premium, while the habit formation augments the equity premium and renders an upward-sloping bond yield curve, on average. In addition, fluctuations in the surplus consumption ratio and the conditional variance of consumption growth allow the model to reproduce pro-cyclical variations in bond and equity yield spreads and counter-cyclical variations in bond and equity term premiums, as observed in the U.S. data.

Keywords: Term structure; Consumption-based asset pricing model; Long-run risks; Habit formation (search for similar items in EconPapers)
JEL-codes: E21 E43 E44 G12 G17 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:94:y:2024:i:c:s1057521924002424

DOI: 10.1016/j.irfa.2024.103310

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