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Asset Return Dynamics under Bad Environment Good Environment Fundamentals

Listed author(s):
  • Geert Bekaert
  • Eric Engstrom

We introduce a "bad environment-good environment" technology for consumption growth in a consumption- based asset pricing model. Using the preference structure from Campbell and Cochrane (1999), the model generates realistic time-varying volatility, skewness and kurtosis in fundamentals while still permitting closed-form solutions for asset prices. The model not only fits standard salient asset prices features including means and volatilities for equity returns and risk free rates, but also generates a realistic variance premium and option prices.

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File URL: http://www.nber.org/papers/w15222.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15222.

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Date of creation: Aug 2009
Handle: RePEc:nbr:nberwo:15222
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