Asset Return Dynamics Under Bad Environment Good Environment Fundamentals

52 Pages Posted: 18 Aug 2009 Last revised: 6 Aug 2010

See all articles by Geert Bekaert

Geert Bekaert

Columbia Business School - Finance and Economics

Eric Engstrom

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

Multiple version iconThere are 4 versions of this paper

Date Written: August 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.

Suggested Citation

Bekaert, Geert and Engstrom, Eric C., Asset Return Dynamics Under Bad Environment Good Environment Fundamentals (August 2009). NBER Working Paper No. w15222. Available at SSRN: https://ssrn.com/abstract=1454938

Geert Bekaert (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Eric C. Engstrom

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)

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