Asset Pricing Explorations for Macroeconomics
John H. Cochrane
University of Chicago - Booth School of Business; Hoover Institution; National Bureau of Economic Research (NBER)
Lars Peter Hansen
University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)
NBER Working Paper No. w4088
In this paper we argue that financial data are a useful proving ground for macroeconomic models, and we explore the channels that link asset market data to such models. We use Hansen and Jagannathan's bounds on the mean and standard deviation of discount factors to survey several asset pricing puzzles. We then extend the bounds to reflect the correlation of discount factors with asset returns and to characterize conditional moments of discount factors. These characterizations help us to understand the behavior of a variety of models studied in the literature. We also incorporate borrowing constraints into the calculations. The borrowing constraints loosen the required properties of aggregate measurements of intertemporal marginal rates of substitution, but also sharpen the implications of asset market data for the marginal rates of substitution of unconstrained individuals.
Number of Pages in PDF File: 76
Date posted: April 27, 2000
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