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Asset Prices with Temporary Shocks to Consumption

Author

Listed:
  • Walter POHL

    (University of Zurich)

  • Karl SCHMEDDERS

    (University of Zurich and Swiss Finance Institute)

  • Ole WILMS

    (University of Zurich)

Abstract

Most standard asset-pricing models assume that all shocks to consumption are permanent. We relax this assumption and allow also for temporary shocks. The implications of our model are dramatically different from those obtained in the prior literature. A canonical and parsimonious asset pricing model with CRRA preferences and temporary shocks can reproduce the equity premium, high return volatility and return predictability with a coefficient of relative risk aversion below ten. This finding suggests that temporary shocks can play an important role in explaining asset pricing puzzles.

Suggested Citation

  • Walter POHL & Karl SCHMEDDERS & Ole WILMS, 2014. "Asset Prices with Temporary Shocks to Consumption," Swiss Finance Institute Research Paper Series 14-41, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1441
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    File URL: http://ssrn.com/abstract=2450090
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    More about this item

    Keywords

    Asset prices; equity premium; unit root; temporary shocks;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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