Mean Reversion and Consumption Smoothing

Fischer Black

No 2946, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Using a simple conventional model with additive separable utility and constant elasticity, we can explain mean reversion and consumption smoothing. The model uses the price of risk and wealth as state variables, but has only one stochastic variable. The price of risk rises temporarily as wealth falls. We also distinguish between risk aversion and the consumption elasticity of marginal utility. We can use the model to match estimates of the average values of consumption volatility, wealth volatility, mean reversion, the growth rate of consumption, the real interest rate, and the market risk premium.

Date: 1989-04
Note: ME
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Citations: View citations in EconPapers (5)

Published as Review of Financial Studies, Vol. 3, no. 1 (1990): 107-114.

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