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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 SeriesDate posted: July 31, 2009 ; Last revised: August 01, 2009Suggested CitationContact Information
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