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Advances in Consumption-Based Asset Pricing: Empirical Tests

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  • Sydney C. Ludvigson

Abstract

The last 15 years has brought forth an explosion of research on consumption-based asset pricing as a leading contender for explaining aggregate stock market behavior. This research has propelled further interest in consumption-based asset pricing, as well as some debate. This chapter surveys the growing body of empirical work that evaluates today's leading consumption-based asset pricing theories using formal estimation, hypothesis testing, and model comparison. In addition to summarizing the findings and debate, the analysis seeks to provide an accessible description of a few key econometric methodologies for evaluating consumption-based models, with an emphasis on method-of-moments estimators. Finally, the chapter offers a prescription for future econometric work by calling for greater emphasis on methodologies that facilitate the comparison of multiple competing models, all of which are potentially misspecified, while calling for reduced emphasis on individual hypothesis tests of whether a single model is specified without error.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16810.

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Date of creation: Feb 2011
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Publication status: published as "Advances in Consumption-Based Asset Pricing: Empirical Tests." Forthcoming in the Handbook of the Economics of Finance, e.d. by George M. Constantinides, Milton Harris and Rene M. Stulz, vol. 2, Elsevier Science B.V., North Holland, Amersterdam.
Handle: RePEc:nbr:nberwo:16810

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  1. Jules H. van Binsbergen & Michael W. Brandt & Ralph S.J. Koijen, 2010. "On the Timing and Pricing of Dividends," NBER Working Papers 16455, National Bureau of Economic Research, Inc.
  2. Del Negro, Marco & Schorfheide, Frank & Smets, Frank & Wouters, Rafael, 2007. "On the Fit of New Keynesian Models," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 25, pages 123-143, April.
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Cited by:
  1. Jules Vanbinsbergen & Michael W. Brandt & Ralph Koijen, 2010. "On the Timing and Pricing of Dividends," Working Papers, Becker Friedman Institute for Research In Economics 2010-010, Becker Friedman Institute for Research In Economics.
  2. Auer, Benjamin R., 2013. "Can habit formation under complete market integration explain the cross-section of international equity risk premia?," Review of Financial Economics, Elsevier, Elsevier, vol. 22(2), pages 61-67.

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