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Asset Pricing with Countercyclical Household Consumption Risk

  • George M. Constantinides
  • Anisha Ghosh

We present evidence that shocks to household consumption growth are negatively skewed, persistent, countercyclical, and play a major role in driving asset prices. We construct a parsimonious model where heterogeneous households have recursive preferences and a single state variable drives the conditional cross-sectional moments of household consumption growth. The estimated model fits well the cross-sectional moments of household consumption growth and the unconditional moments of the risk-free rate, equity premium, market price-dividend ratio, and aggregate dividend and consumption growth. Consistent with empirical evidence, the model-implied risk-free rate and price-dividend ratio are pro-cyclical while the market return has countercyclical mean and variance.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 20110.

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Date of creation: May 2014
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Handle: RePEc:nbr:nberwo:20110
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  18. Constantinides,George & Duffie,Darrel, 1992. "Asset pricing with heterogeneous consumers," Discussion Paper Serie A 381, University of Bonn, Germany.
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