Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
959639 | Journal of Financial Economics | 2011 | 17 Pages |
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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Authors
Wei Yang,