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Asset Pricing with Countercyclical Household Consumption Risk

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  • George M. Constantinides
  • Anisha Ghosh

Abstract

We show that shocks to household consumption growth are negatively skewed, persistent, countercyclical, and drive asset prices. We construct a parsimonious model where heterogeneous households have recursive preferences. A single state variable drives the conditional cross-sectional moments of household consumption growth. The estimated model fits well the unconditional cross-sectional moments of household consumption growth and the moments of the risk-free rate, equity premium, price-dividend ratio, and aggregate dividend and consumption growth. The model-implied risk-free rate and price-dividend ratio are procyclical while the market return has countercyclical mean and variance. Finally, household consumption risk explains the cross-section of excess returns.

Suggested Citation

  • George M. Constantinides & Anisha Ghosh, 2014. "Asset Pricing with Countercyclical Household Consumption Risk," NBER Working Papers 20110, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:20110
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    1. repec:eee:moneco:v:88:y:2017:i:c:p:1-14 is not listed on IDEAS
    2. Fatih Guvenen & Fatih Karahan & Serdar Ozkan & Jae Song, 2015. "What Do Data on Millions of U.S. Workers Reveal about Life-Cycle Earnings Risk?," NBER Working Papers 20913, National Bureau of Economic Research, Inc.
    3. Davide Malacrino & Eran Hoffmann, 2016. "Employment Time and the Cyclicality of Earnings Growth," 2016 Meeting Papers 1556, Society for Economic Dynamics.
    4. anmol bhandari & Hengjie Ai, 2016. "Asset Pricing with Endogenously Uninsurable Tail Risks," 2016 Meeting Papers 1523, Society for Economic Dynamics.
    5. Christopher Busch & David Domeij & Fatih Guvenen & Rocio Madera, 2018. "Asymmetric Business-Cycle Risk and Social Insurance," NBER Working Papers 24569, National Bureau of Economic Research, Inc.
    6. Andrew Y. Chen & Rebecca Wasyk & Fabian Winkler, 2017. "A Likelihood-Based Comparison of Macro Asset Pricing Models," Finance and Economics Discussion Series 2017-024, Board of Governors of the Federal Reserve System (U.S.).
    7. Herskovic, Bernard & Kelly, Bryan & Lustig, Hanno & Van Nieuwerburgh, Stijn, 2016. "The common factor in idiosyncratic volatility: Quantitative asset pricing implications," Journal of Financial Economics, Elsevier, vol. 119(2), pages 249-283.
    8. Fatih Guvenen, 2015. "The Research Agenda: Fatih Guvenen on Findings from Big Data on Income Inequality and Income Uncertainty," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 16(1), April.
    9. repec:eee:eecrev:v:103:y:2018:i:c:p:39-59 is not listed on IDEAS

    More about this item

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General

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