Macro-Finance

John Cochrane

Review of Finance, 2017, vol. 21, issue 3, 945-985

Abstract: Macro-finance addresses the link between asset prices and economic fluctuations. Many models reflect the same rough idea: the market’s ability to bear risk is greater in good times, and less in bad times. Models achieve this similar result by quite different mechanisms. I contrast their strengths and weaknesses. I highlight directions for future research, including additional facts to be matched, and limitations of the models that should prod future theoretical work. I describe how macro-finance models can fundamentally alter macroeconomics, by putting time-varying risk premiums and risk-bearing capacity at the center of recessions rather than variation in the interest rate and intertemporal substitution.

Keywords: Macro-finance, Equity premium, Volatility Received December 30, 2016; accepted January 23, 2017 by Editor Alex Edmans. (search for similar items in EconPapers)
JEL-codes: E1 G1 (search for similar items in EconPapers)
Date: 2017
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Working Paper: Macro-Finance (2016)
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