Asset Pricing with Countercyclical Household Consumption Risk

George Constantinides and Anisha Ghosh

No 20110, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We show that shocks to household consumption growth are negatively skewed, persistent, countercyclical, and drive asset prices. We construct a parsimonious model where heterogeneous households have recursive preferences. A single state variable drives the conditional cross-sectional moments of household consumption growth. The estimated model fits well the unconditional cross-sectional moments of household consumption growth and the moments of the risk-free rate, equity premium, price-dividend ratio, and aggregate dividend and consumption growth. The model-implied risk-free rate and price-dividend ratio are procyclical while the market return has countercyclical mean and variance. Finally, household consumption risk explains the cross-section of excess returns.

JEL-codes: D31 D52 E32 E44 G01 G12 J60 (search for similar items in EconPapers)
Date: 2014-05
New Economics Papers: this item is included in nep-mac
Note: AP
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Citations: View citations in EconPapers (19)

Published as GEORGE M. CONSTANTINIDES & ANISHA GHOSH, 2017. "Asset Pricing with Countercyclical Household Consumption Risk," The Journal of Finance, vol 72(1), pages 415-460.

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Journal Article: Asset Pricing with Countercyclical Household Consumption Risk (2017)
Working Paper: Asset Pricing with Countercyclical Household Consumption Risk (2015)
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