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Long-run risk in durable consumption

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  • Yang, Wei

Abstract

Durable consumption growth is persistent and predicted by the price-dividend ratio. This provides strong and direct evidence for the existence of a highly persistent expected component. Durable consumption growth is left-skewed and exhibits time-varying volatility. I model durable consumption growth as containing a persistent expected component and driven by counter-cyclical volatility, nondurable consumption as a random walk, and dividend growth as exposed to the expected component of durable consumption growth. Together with nonseparable Epstein-Zin preferences, the model demonstrates that long-run risk in durable consumption can explain major asset market phenomena. The model also generates an upward-sloping real term structure.

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  • Yang, Wei, 2011. "Long-run risk in durable consumption," Journal of Financial Economics, Elsevier, vol. 102(1), pages 45-61, October.
    • Handle: RePEc:eee:jfinec:v:102:y:2011:i:1:p:45-61
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    9. Sushanta K. Mallick & Mohammed Mohsin, 2016. "Macroeconomic Effects of Inflationary Shocks with Durable and Non-Durable Consumption," Open Economies Review, Springer, vol. 27(5), pages 895-921, November.
    10. Chen, Guojin & Hong, Zhiwu & Ren, Yu, 2016. "Durable consumption and asset returns: Cointegration analysis," Economic Modelling, Elsevier, vol. 53(C), pages 231-244.
    11. Ravi Jagannathan & Srikant Marakani, 2015. "Price-Dividend Ratio Factor Proxies for Long-Run Risks," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 5(1), pages 1-47.
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