When the Going Gets Tough: Durable Consumption and the Equity Premium
Centre for Growth and Business Cycle Research Discussion Paper Series from Economics, The University of Manchester
I present an endowment economy where a representative agent has recursive preferences over the consumption of non-durable and durable goods, and uncertainty about the underlying endowments. Using parameter calibration consistent with real business cycle literature (risk aversion coefficient of 2.1 and elasticity of intertemporal substitution of 1.09), the model generates a high level of equity premium and a low and stable risk-free rate. The model is also able to explain up to 60% of the equity volatility. The volatile expenditure on durable consumption goods generates a high and volatile equity premium; endogenous time-varying uncertainty produces a counter-cyclical equity premium.
Pages: 34 pages
New Economics Papers: this item is included in nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
http://hummedia.manchester.ac.uk/schools/soss/cgbc ... apers/dpcgbcr225.pdf (application/pdf)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:man:cgbcrp:225
Access Statistics for this paper
More papers in Centre for Growth and Business Cycle Research Discussion Paper Series from Economics, The University of Manchester Contact information at EDIRC.
Bibliographic data for series maintained by Marianne Sensier ().