Asset Pricing with Countercyclical Household Consumption Risk

Anisha Ghosh and George Constantinides
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Anisha Ghosh: Carnegie Mellon University

No 185, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: We present evidence that shocks to household consumption growth are negatively skewed, persistent, countercyclical, and play a major role in driving asset prices. We construct a parsimonious model where heterogeneous households have recursive preferences and a single state variable drives the conditional cross-sectional moments of household consumption growth. The estimated model fits well the cross-sectional moments of household consumption growth and the unconditional moments of the risk-free rate, equity premium, market price-dividend ratio, and aggregate dividend and consumption growth. Consistent with empirical evidence, the model implied risk-free rate and price-dividend ratio are pro cyclical while the market return has countercyclical mean and variance.

Date: 2015
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Related works:
Journal Article: Asset Pricing with Countercyclical Household Consumption Risk (2017)
Working Paper: Asset Pricing with Countercyclical Household Consumption Risk (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed015:185

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