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Long-run risk in durable consumption

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  • Yang, Wei
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    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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    File URL: http://www.sciencedirect.com/science/article/pii/S0304405X11000882
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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
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

    Keywords: Durable consumption Long-run risk Skewness Equity premium Term structure of real interest rates;

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    Cited by:

    1. Riccardo Colacito & Eric Ghysels & Jinghan Meng & Wasin Siwasarit, 2016. "Skewness in Expected Macro Fundamentals and the Predictability of Equity Returns: Evidence and Theory," Review of Financial Studies, Society for Financial Studies, vol. 29(8), pages 2069-2109.
    2. 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.
    3. Chen, Guojin & Hong, Zhiwu & Ren, Yu, 2016. "Durable consumption and asset returns: Cointegration analysis," Economic Modelling, Elsevier, vol. 53(C), pages 231-244.
    4. Bakshi, Gurdip & Chabi-Yo, Fousseni, 2012. "Variance bounds on the permanent and transitory components of stochastic discount factors," Journal of Financial Economics, Elsevier, vol. 105(1), pages 191-208.
    5. Ravi Jagannathan & Srikant Marakani, 2011. "Price Dividend Ratio Factors : Proxies for Long Run Risk," NBER Working Papers 17484, National Bureau of Economic Research, Inc.
    6. Wang, Qin & Ren, Yu & Zou, Yiheng, 2016. "Uninsured expense shocks and equity premia," Economic Modelling, Elsevier, vol. 58(C), pages 64-74.
    7. Vlad Rosca & Raluca Ignat, 2014. "The Sustainability of Fish Consumption in Romania: Customer Behaviour prior and after the Country`s Adherence to the EU," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, vol. 16(35), pages 243-243, February.
    8. Qin Wang & Yiheng Zou & Yu Ren & Zhuo Huang, 2015. "The Spirit of Capitalism and the Equity Premium," Annals of Economics and Finance, Society for AEF, vol. 16(2), pages 493-513, November.
    9. Myroslav Pidkuyko, 2016. "When the Going Gets Tough: Durable Consumption and the Equity Premium," Centre for Growth and Business Cycle Research Discussion Paper Series 225, Economics, The Univeristy of Manchester.
    10. Ren, Yu & Yuan, Yufei & Zhang, Yang, 2014. "Human capital, household capital and asset returns," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 11-22.

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