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Consumption-based modeling of long-horizon returns

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  • Kent D. Daniel
  • David A. Marshall

Abstract

Numerous studies have documented the failure of consumption-based pricing models to explain observed patterns in stock and bond returns. This failure has sometimes been attributed to frictions, transaction costs or durability. If such frictions are important, they should primarily affect the higher frequency components of asset returns. The long-swings, or lower-frequency comovements should be less affected. Consequently if transaction costs are important, tests of the consumption based asset pricing model which concentrate on lower-frequency components may be more successful.

Suggested Citation

  • Kent D. Daniel & David A. Marshall, 1998. "Consumption-based modeling of long-horizon returns," Working Paper Series WP-98-18, Federal Reserve Bank of Chicago.
  • Handle: RePEc:fip:fedhwp:wp-98-18
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    File URL: http://www.chicagofed.org/digital_assets/publications/working_papers/1998/wp98_18.pdf
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    References listed on IDEAS

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    Cited by:

    1. Lawrence J. Christiano & Michele Boldrin & Jonas D. M. Fisher, 2001. "Habit Persistence, Asset Returns, and the Business Cycle," American Economic Review, American Economic Association, pages 149-166.
    2. Cogley, Timothy, 2002. "Idiosyncratic risk and the equity premium: evidence from the consumer expenditure survey," Journal of Monetary Economics, Elsevier, pages 309-334.
    3. Canzoneri, Matthew B. & Cumby, Robert E. & Diba, Behzad T., 2007. "Euler equations and money market interest rates: A challenge for monetary policy models," Journal of Monetary Economics, Elsevier, pages 1863-1881.

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