Technological Growth, Asset Pricing, and Consumption Risk over Long Horizons
AbstractIn this paper we develop a theoretical model in order to understand comovements between asset returns and consumption over longer horizons. We develop an intertemporal general equilibrium model featuring two types of shocks: small, frequent and disembodied shocks to productivity and large technological innovations, which are embodied into new vintages of the capital stock. The latter type of shocks affect the economy with significant lags, since firms need to make irreversible investments in the new types of capital and there is an option value to waiting. The model produces endogenous cycles, countercyclical variation in risk premia, and only a very modest degree of predictability in consumption and dividend growth as observed in the data. In the model, the conventional consumption CAPM holds conditionally. Yet, by conditioning down we show that its resulting unconditional version takes a form that resembles closely the version of the CAPM used in the literature on eventual or long run risk, and most closely Juliard and Parker (2005). We then use the model as a laboratory to show that in our simulated data the unconditional consumption CAPM performs badly, while its long-horizon version performs significantly better.
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 93.
Date of creation: 03 Dec 2006
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Web page: http://www.EconomicDynamics.org/society.htm
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Continuous Time Asset Pricing; Long Horizons; Technology; Growth Options; Consumption CAPM;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- E23 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Production
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- Hengjie Ai & Dana Kiku, 2008. "A Model of Cross-Section of Equity Returns and Firm Dynamics," 2008 Meeting Papers 1030, Society for Economic Dynamics.
- Hanno Lustig, . "Exploring the Link between Housing and the Value Premium (joint with Stijn Van Nieuwerburgh)," UCLA Economics Online Papers 389, UCLA Department of Economics.
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