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Asset Return Dynamics under Bad Environment-Good Environment Fundamentals

Geert Bekaert
Columbia University - Columbia Business School, Economics Department; National Bureau of Economic Research (NBER)

Eric Engstrom
U.S. Board of Governors of the Federal Reserve System - Division of Research and Statistics, Capital Markets


July 28, 2009


Abstract:     
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.

Keywords: Equity premium, variance premium, Countercyclical risk aversion, Economic Uncertainty, Dividend yield, Return predictability

JEL Classifications: G12, G15, E44

Working Paper Series

Date posted: July 31, 2009 ; Last revised: August 01, 2009

Suggested Citation

Bekaert, Geert and Engstrom, Eric C., Asset Return Dynamics under Bad Environment-Good Environment Fundamentals (July 28, 2009). Available at SSRN: http://ssrn.com/abstract=1440226


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Contact Information

Eric C. Engstrom (Contact Author)
U.S. Board of Governors of the Federal Reserve System - Division of Research and Statistics, Capital Markets ( email )
20th & C. St., N.W.
Washington, DC 20551
United States
202-452-3044 (Phone)
Geert Bekaert
Columbia University - Columbia Business School, Economics Department ( email )
3022 Broadway
New York, NY 10027
United States
212-854-9156 (Phone)
212-662-8474 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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