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Is Consumption Growth Only A Sideshow In Asset Pricing
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Book Synopsis Is Consumption Growth Only a Sideshow in Asset Pricing? by : Thomas A. Maurer
Download or read book Is Consumption Growth Only a Sideshow in Asset Pricing? written by Thomas A. Maurer and published by . This book was released on 2012 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: I show that risk sources such as unexpected demographic changes or shocks to the agent's subjective time preferences may have stronger implications and be of greater importance for asset pricing than risk in the (aggregate) consumption growth process. In the first chapter, I discuss stochastic changes to time preferences. Shocks to the agent's subjective time discounting of future utility cause stochastic changes in asset prices and the agent's value function. Independent of the consumption growth process, shocks to time discounting imply a covariation between asset returns and the marginal utility process, and the equity premium is non-zero. My model can generate both a reasonably low level and volatility in the risk-free real interest rate and a high stock price volatility and equity premium. If time discounting follows a process with mean- reversion, then the interest rate process is mean-reverting and stock returns are (at long horizons) negatively auto-correlated. In the second chapter, I analyze the asset pricing implications of birth and death rate shocks in an overlapping generations model. The interest rate and the equity premium are time varying and under certain conditions the interest rate is lower and the equity premium is higher during periods characterized by a high birth rate and low mortality than in times of a low birth rate and high mortality. Demographic changes may explain substantial parts of the time variation in the real interest rate and the equity premium. Demographic uncertainty implies a large unconditional variation in asset returns and leads to stochastic changes in the conditional volatility of stock returns. In the last chapter, I illustrate how shocks to the death rate may affect expected asset returns in the cross-section. An agent demands more of an asset with higher (lower) payoff in states of the world when he expects to live longer (shorter) and marginal utility is high (low) than an asset with the opposite payoff schedule. In equilibrium, the first asset pays a lower expected return than the latter. Empirical evidence supports the model. Out-of-sample evidence suggests that a strategy, which loads on uncertainty in the death rate, pays a positive unexplained return according to traditional market models.
Book Synopsis Asset Pricing with Long Run Risks in Consumption Growth by : George M. Constantinides
Download or read book Asset Pricing with Long Run Risks in Consumption Growth written by George M. Constantinides and published by . This book was released on 2008 with total page 57 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Essays on Consumption and Asset Pricing Puzzles by :
Download or read book Essays on Consumption and Asset Pricing Puzzles written by and published by . This book was released on with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis contributes to the literature on the consumption-portfolio choice under uncertainty and is motivated by several empirical failures of the standard consumption-based capital asset pricing model (CCAPM). This canonical model has proven disappointing empirically and has even been questioned whether it is theoretically valuable and practically useful even if it is in some sense the only model we have. The frustration is due to that the model performs no better in practice and generates some well-known consumption puzzles and asset pricing puzzles. The purpose of the thesis is to reexamine these puzzles and then to resolve them. After the debate of Hansen and Singleton (1983) and Hall (1988), the estimates of the elasticity of intertemporal substitution (EIS) of consumption in a representative agent model have not resulted in any consensus. Based on this observation, the first chapter of this thesis is focused on resolving the elasticity puzzle or the unresponsiveness to interest rates. We propose a new theoretical and empirical perspective on the relationship between consumption growth and asset returns. In the spirit of Hansen and Singleton (1983), we demonstrate that observed growth rate of consumption responds not only to a specific asset return but also to other asset returns. Empirically, US postwar quarterly data are used to fit the regression model derived in the chapter, and the sample period is 1953Q2-2001Q2. Empirical results show that the EIS is greater than 0.1, the maximum value considered possible by Hall (1988). Accordingly, we argue that there is no elasticity puzzle in the standard representative agent model. The second chapter provides an explanation for the puzzle of excess sensitivity of consumption to expected income proposed by Flavin (1981). We exploit consumer's superior information (i.e., windfalls in investments and in income) to integrate the consumption Euler equations into a generalized Euler equation. The implications emerging f.
Book Synopsis Evaluating Asset Pricing Models with Limited Commitment Using Household Consumption Data by : Dirk Krueger
Download or read book Evaluating Asset Pricing Models with Limited Commitment Using Household Consumption Data written by Dirk Krueger and published by . This book was released on 2007 with total page 28 pages. Available in PDF, EPUB and Kindle. Book excerpt: We evaluate the asset pricing implications of a class of models in which risk sharing is imperfect because of limited enforcement of intertemporal contracts. Lustig (2004) has shown that in such a model the asset pricing kernel can be written as a simple function of the aggregate consumption growth rate and the growth rate of consumption of the set of households that do not face binding enforcement constraints. These unconstrained households have lower consumption growth rates than all other households in the economy. We use household data on consumption growth from the U.S. Consumer Expenditure Survey to identify unconstrained households, to estimate the pricing kernel implied by these models and evaluate their performance in pricing aggregate risk. We find that for high values of the relative risk aversion coefficient, the limited enforcement pricing kernel generates a market price of risk that is substantially closer to the data than the one obtained using the standard complete markets asset pricing kernel.
Book Synopsis Natural expectations, macroeconomic dynamics, and asset pricing by : Andreas Fuster
Download or read book Natural expectations, macroeconomic dynamics, and asset pricing written by Andreas Fuster and published by . This book was released on 2011 with total page 72 pages. Available in PDF, EPUB and Kindle. Book excerpt: How does an economy behave if (1) fundamentals are truly hump-shaped, exhibiting momentum in the short run and partial mean reversion in the long run, and (2) agents do not know that fundamentals are hump-shaped and base their beliefs on parsimonious models that they fit to the available data? A class of parsimonious models leads to qualitatively similar biases and generates empirically observed patterns in asset prices and macroeconomic dynamics. First, parsimonious models will robustly pick up the short-term momentum in fundamentals but will generally fail to fully capture the long-run mean reversion. Beliefs will therefore be characterized by endogenous extrapolation bias and pro-cyclical excess optimism. Second, asset prices will be highly volatile and exhibit partial mean reversion-i.e., overreaction. Excess returns will be negatively predicted by lagged excess returns, P/E ratios, and consumption growth. Third, real economic activity will have amplified cycles. For example, consumption growth will be negatively auto-correlated in the medium run. Fourth, the equity premium will be large. Agents will perceive that equities are very risky when in fact long-run equity returns will co-vary only weakly with long-run consumption growth. If agents had rational expectations, the equity premium would be close to zero. Fifth, sophisticated agents-i.e., those who are assumed to know the true model-will hold far more equity than investors who use parsimonious models. Moreover, sophisticated agents will follow a counter-cyclical asset allocation policy. These predicted effects are qualitatively confirmed in U.S. data.
Book Synopsis Macroeconomics ; Australasian Edition by : Olivier Blanchard
Download or read book Macroeconomics ; Australasian Edition written by Olivier Blanchard and published by Pearson Higher Education AU. This book was released on 2013-05-30 with total page 665 pages. Available in PDF, EPUB and Kindle. Book excerpt: Real, current macroeconomic events connected to the theory The new fourth edition of Blanchard's respected Macroeconomics text has been substantially revised to account for the impact of the GFC on the Australasian Economy and the many issues it raises. Thus, in addition to a first discussion of the crisis in Chapter 1 and numerous boxes and discussions throughout the book, we have brought forward the chapter on the GFC to Chapter 9. Macroeconomics is the only intermediate resource with a truly Australasian focus, demonstrating economic ideas and issues with hundreds of local and international examples. This comprehensive resource presents an integrated view of macroeconomics, drawing on the implications of equilibrium conditions in three sets of markets: the goods market, the financial markets and the labour market.
Book Synopsis Advances in the Economics of Aging by : David A. Wise
Download or read book Advances in the Economics of Aging written by David A. Wise and published by University of Chicago Press. This book was released on 2007-12-01 with total page 368 pages. Available in PDF, EPUB and Kindle. Book excerpt: This volume presents innovative research on issues of importance to the well-being of older persons: labor market behavior, health care, housing and living arrangements, and saving and wealth. Specific topics include the effect of labor market rigidities on the employment of older workers; the effect on retirement of the availability of continuation coverage benefits; and the influence of the prospective payment system (PPS) on rising Medicare costs. Also considered are the effects of health and wealth on living arrangement decisions; the incentive effects of employer-provided pension plans; the degree of substitution between 401(k) plans and other employer-provided retirement saving arrangements; and the extent to which housing wealth determines how much the elderly save and consume. Two final studies use simulations that describe the implications of stylized economic models of behavior among the elderly. This timely volume will be of interest to anyone concerned with the economics of aging.
Book Synopsis Asset Prices, Consumption, and the Business Cycle by : John Y. Campbell
Download or read book Asset Prices, Consumption, and the Business Cycle written by John Y. Campbell and published by . This book was released on 1998 with total page 122 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper reviews the behavior of financial asset prices in relation to consumption. The paper lists some important stylized facts that characterize US data, and relates them to recent developments in equilibrium asset pricing theory. Data from other countries are examined to see which features of the US experience apply more generally. The paper argues that to make sense of asset market behavior one needs a model in which the market price of risk is high, time-varying, and correlated with the state of the economy. Models that have this feature, including models with habit-formation in utility, heterogeneous investors, and irrational expectations, are discussed. The main focus is on stock returns and short-term real interest rates, but bond returns are also considered.
Book Synopsis Consumption-based Asset Pricing with Higher Cumulants by : Ian Martin
Download or read book Consumption-based Asset Pricing with Higher Cumulants written by Ian Martin and published by . This book was released on 2010 with total page 39 pages. Available in PDF, EPUB and Kindle. Book excerpt: I extend the Epstein-Zin-lognormal consumption-based asset-pricing model to allow for general i.i.d. consumption growth. Information about the higher moments--equivalently, cumulants--of consumption growth is encoded in the cumulant-generating function. I apply the framework to economies with rare disasters, and argue that the importance of such disasters is a double-edged sword: parameters that govern the frequency and sizes of rare disasters are critically important for asset pricing, but extremely hard to calibrate. I show how to sidestep this issue by using observable asset prices to make inferences that are robust to the details of the underlying consumption process.
Book Synopsis Technological Growth, Asset Pricing, and Consumption Risk by :
Download or read book Technological Growth, Asset Pricing, and Consumption Risk written by and published by . This book was released on 2006 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Consumption-based Asset Pricing with Higher Cumulants by : Ian Martin (Assistant Professor of Finance (2008-present))
Download or read book Consumption-based Asset Pricing with Higher Cumulants written by Ian Martin (Assistant Professor of Finance (2008-present)) and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: I extend the Epstein-Zin-lognormal consumption-based asset-pricing model to allow for general i.i.d. consumption growth. Information about the higher moments--equivalently, cumulants--of consumption growth is encoded in the cumulant-generating function. I apply the framework to economies with rare disasters, and argue that the importance of such disasters is a double-edged sword: parameters that govern the frequency and sizes of rare disasters are critically important for asset pricing, but extremely hard to calibrate. I show how to sidestep this issue by using observable asset prices to make inferences that are robust to the details of the underlying consumption process -- National Bureau of Economic Research web site.
Book Synopsis Using Long-Run Consumption-Return Correlations to Test Asset Pricing Models by : Jianfeng Yu
Download or read book Using Long-Run Consumption-Return Correlations to Test Asset Pricing Models written by Jianfeng Yu and published by . This book was released on 2012 with total page 47 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines a new set of implications for existing asset pricing models regarding the correlation between returns and consumption growth over both the short run and the long run. The fi ndings suggest that external habit formation models face a challenge in producing two robust facts in aggregate data, namely, that stock market returns lead consumption growth, and that the correlation between returns and consumption growth is higher at low frequencies. To reconcile these facts with a consumption-based model, I demonstrate the need for focusing on models that contain a forward looking consumption component, i.e., models that allow for both trend and cyclical fluctuations in consumption, and that link returns to cyclical fluctuations in consumption. Long-run risk models provide examples of models that contain this consumption component.
Book Synopsis Heterogeneity and Asset Prices by : Nicolae B. Gârleanu
Download or read book Heterogeneity and Asset Prices written by Nicolae B. Gârleanu and published by . This book was released on 2020 with total page 60 pages. Available in PDF, EPUB and Kindle. Book excerpt: We develop a tractable asset-pricing framework characterized by imperfect risk sharing among cohorts, who experience different levels of integrated life-time endowments. While all asset-pricing implications stem from the heterogeneity of consumption among investors, cross-sectional measures of inequality are non-volatile, only weakly related to asset prices, and far more persistent than the price-to-dividend ratio. We show how to identify a marginal agent's consumption growth in this framework by utilizing cross-sectional information. Our proposed notion of marginal-agent consumption growth exhibits different and more volatile low-frequency variation than the aggregate consumption growth per capita, which is normally used in representative agent models. These low frequency movements in our measure of marginal agent consumption growth can explain a large portion of the low frequency movements in real interest rates and, when combined with recursive preferences, can account quantitatively for the stylized asset-pricing facts (high market price of risk, equity premium, volatility, and return predictability).
Book Synopsis Heterogeneity and Asset Prices by : Nicolae Garleanu
Download or read book Heterogeneity and Asset Prices written by Nicolae Garleanu and published by . This book was released on 2020 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: We develop a tractable asset-pricing framework characterized by imperfect risk sharing among cohorts, who experience different levels of integrated life-time endowments. While all asset-pricing implications stem from the heterogeneity of consumption among investors, cross-sectional measures of inequality are non-volatile, only weakly related to asset prices, and far more persistent than the price-to-dividend ratio. We show how to identify a marginal agent's consumption growth in this framework by utilizing cross-sectional information. Our proposed notion of marginal-agent consumption growth exhibits different and more volatile low-frequency variation than the aggregate consumption growth per capita, which is normally used in representative agent models. These low frequency movements in our measure of marginal agent consumption growth can explain a large portion of the low frequency movements in real interest rates and, when combined with recursive preferences, can account quantitatively for the stylized asset-pricing facts (high market price of risk, equity premium, volatility, and return predictability).
Book Synopsis Consumption Asset Pricing and the Term Structure by : Stuart Hyde
Download or read book Consumption Asset Pricing and the Term Structure written by Stuart Hyde and published by . This book was released on 2020 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We investigate the relationship between consumption and the term structure using UK interest rate data. We demonstrate that the term structure contains information about future economic activity since the yield spread has forecasting power for future consumption growth. Further we analyze the ability of the consumption based capital asset pricing model (C-CAPM) using traditional power utility, two habit formation specifications proposed by Abel (1990) and Campbell and Cochrane (1999) and novelly, the housing C-CAPM proposed by Piazzesi et al. (2007) to characterize the term structure of interest rates. Our findings are supportive of the habit formation specification of Campbell and Cochrane (1999), other models fail to yield economically plausible parameter values.
Book Synopsis Essays on Consumption and Saving by : Robert Allen Vergun
Download or read book Essays on Consumption and Saving written by Robert Allen Vergun and published by . This book was released on 1993 with total page 208 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Multifactor Consumption Based Asset Pricing Models Using the US Stock Market as a Reference by : John Hunter
Download or read book Multifactor Consumption Based Asset Pricing Models Using the US Stock Market as a Reference written by John Hunter and published by . This book was released on 2014 with total page 19 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper we extend the time series analysis to the panel frame-work to test the C-CAPM driven by wealth references for developed countries. Speciጿically, we focus on a linearised form of the Consumption-based CAPM in a pooled cross section panel model with two-way error components. The empirical fiijndings of this two-factor model with various speciጿications all indicate that there is signiጿicant unobserved heterogeneity captured by cross-country ጿixed effects when consumption growth is treated as a common factor, of which the average risk aversion coefficient is 4.285. However, the cross-sectional impact of home consumption growth varies dramatically over the countries, where unobserved heterogeneity of risk aversion can also be addressed by random effects.
