Asset Return Dynamics under Habits and Bad-Environment Good-Environment Fundamentals

Geert Bekaert and Eric Engstrom

No 2015-53, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We introduce a \"bad environment-good environment\" (BEGE) technology for consumption growth in a consumption-based asset pricing model with external habit formation. The model generates realistic non-Gaussian features of consumption growth and fits standard salient features of asset prices including the means and volatilities of equity returns and a low risk free rate. BEGE dynamics additionally allow the model to generate realistic properties of equity index options prices, and their comovements with the macroeconomic outlook. In particular, when option implied volatility is high, as measured for instance by the VIX index, the distribution of consumption growth is more negatively skewed.

Keywords: VIX; equity premiums; habit; risk aversion; skewness (search for similar items in EconPapers)
Pages: 62 pages
Date: 2015-07-03
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Citations: View citations in EconPapers (3)

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http://www.federalreserve.gov/econresdata/feds/2015/files/2015053pap.pdf Full text (application/pdf)
http://dx.doi.org/10.17016/FEDS.2015.053 http://dx.doi.org/10.17016/FEDS.2015.053 (application/pdf)

Related works:
Journal Article: Asset Return Dynamics under Habits and Bad Environment-Good Environment Fundamentals (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2015-53

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