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Long-run risk in durable consumption

  • Yang, Wei
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    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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    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 102 (2011)
    Issue (Month): 1 (October)
    Pages: 45-61

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    Handle: RePEc:eee:jfinec:v:102:y:2011:i:1:p:45-61
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