Long-run risk in durable consumption

Wei Yang

Journal of Financial Economics, 2011, vol. 102, issue 1, 45-61

Abstract: Durable consumption growth is persistent and predicted by the price-dividend ratio. This provides strong and direct evidence for the existence of a highly persistent expected component. Durable consumption growth is left-skewed and exhibits time-varying volatility. I model durable consumption growth as containing a persistent expected component and driven by counter-cyclical volatility, nondurable consumption as a random walk, and dividend growth as exposed to the expected component of durable consumption growth. Together with nonseparable Epstein-Zin preferences, the model demonstrates that long-run risk in durable consumption can explain major asset market phenomena. The model also generates an upward-sloping real term structure.

Keywords: Durable; consumption; Long-run; risk; Skewness; Equity; premium; Term; structure; of; real; interest; rates (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (18)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:102:y:2011:i:1:p:45-61

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