Is Consumption Growth merely a Sideshow in Asset Pricing?

47 Pages Posted: 25 Apr 2012 Last revised: 12 Feb 2013

See all articles by Thomas Andreas Maurer

Thomas Andreas Maurer

The University of Hong Kong; Washington University in St. Louis - John M. Olin Business School; London School of Economics & Political Science (LSE)

Date Written: December 1, 2012

Abstract

I study a parsimonious model of a time-varying market risk premium. State pricing is dominated by time preference shocks that may be independent of the consumption process. The model resolves several asset pricing puzzles and provides predictions for how the risk premium varies with measurable financial quantities like the price-earnings ratio and interest rates. Time preference shocks can generate a low level and volatility in the real interest rate and a high stock price volatility and equity premium. The price-earnings ratio has power to predict future stock returns and reveals information about unobservable financial quantities.

Keywords: time preference shocks, taste shocks, demand shocks, equity premium, risk-free rate puzzle, correlation puzzle, consumption based asset pricing, general equilibrium, recursive preferences, return predictability, auto-correlation in stock return

JEL Classification: G11, G12, G14, G17, D51

Suggested Citation

Maurer, Thomas Andreas, Is Consumption Growth merely a Sideshow in Asset Pricing? (December 1, 2012). Available at SSRN: https://ssrn.com/abstract=2046168 or http://dx.doi.org/10.2139/ssrn.2046168

Thomas Andreas Maurer (Contact Author)

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
Hong Kong

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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